Compound Interest

Compound interest is the concept of earning interest on both the principal amount and the accumulated interest. Over time, this can add up significantly and boost your savings.

Formula for Calculating Compound Interest

The formula for calculating compound interest is:

A = P(1 + r/n)^(nt)

Where:

• A is the amount of money you'll have after a certain amount of time
• P is the principal amount
• r is the annual interest rate
• n is the number of times the interest is compounded per year
• t is the number of years

Example

Let's say you invest $1,000 in a savings account with an interest rate of 4% that is compounded quarterly. After one year, you would have:

A = 1000(1 + 0.04/4)^(4*1) A = 1000(1.01)^4 A = 1040.60

So, your investment would be worth $1,040.60 after one year. If you left that money in the account for another year, it would be worth $1,082.43 after two years, and so on.

Compound Interest and Debt

Compound interest can also work against you if you have debt. If you have a credit card with a high interest rate, the interest can compound and make your debt grow quickly. That's why it's important to pay off your credit card balance in full each month if possible, and to avoid carrying a balance whenever you can.

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