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Compound Interest Explained
FinanceHow compound interest works and why it matters for your money.
The Power of Compound Interest
Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. Albert Einstein reportedly called it the "eighth wonder of the world."
The Compound Interest Formula
A = P(1 + r/n)nt
Understanding the Variables
| Variable | Meaning | Example |
|---|---|---|
| A | Final amount | What you end up with |
| P | Principal | $1,000 initial investment |
| r | Annual interest rate (decimal) | 5% = 0.05 |
| n | Times compounded per year | 12 for monthly |
| t | Time in years | 10 years |
Example Calculation
$1,000 invested at 5% annual interest, compounded monthly, for 10 years:
A = 1000(1 + 0.05/12)12×10
A = 1000(1.00417)120
A = $1,647.01
That's $647.01 in interest — more than you'd get with simple interest!
The Rule of 72
A quick way to estimate how long it takes to double your money:
Years to Double ≈ 72 / Interest Rate
At 6% interest, your money doubles in about 72/6 = 12 years.
Calculate Your Returns
Try our Compound Interest Calculator!