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Compound interest is when the interest you earn on a balance in a savings or investing account is reinvested, earning you more interest. This powerful financial tool can be used to grow your savings or investments over time. Traditional income investments are slightly better than leaving money in a savings account, however the best interest rates on CDs (certificates of deposit) currently range from 1.30% to 2.50%. Compounding interest is a great way to maximize your returns, as it factors in the interest earned on the initial balance.
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Compounding interest is calculated by using the following formula: A = P (1 + r/n) ^ nt. In this formula, A is the amount after compounding, P is the principal amount, r is the interest rate, n is the number of times the interest is compounded in a year, and t is the number of years. Compound interest can be calculated daily, monthly, or annually.
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Compound interest can be a great way to save for retirement or grow your investments over time. Compound interest is known as the “eighth wonder of the world” because of its powerful ability to grow your money. Starting early is key - even if it doesn’t seem like much, even a small amount of money saved can grow quickly and substantially with Compound interest.