What is compound interest?
Compound interest is a powerful concept that plays a significant role in the world of investing and saving. It has the potential to turn even small amounts of money into substantial sums over time. Compound interest refers to the process of earning interest not only on the initial amount invested but also on the accumulated interest itself. In simple terms, its interest on top of interest, creating a compounding effect that accelerates the growth of your money.
When you use a compound interest calculator, youll get two key results:
How to calculate Compound Interest in a savings account?*
To calculate compound interest in a savings account, you can use the following compound interest formula:
For example, lets say you deposit $1,000 into a savings account with a 5% annual interest rate. If you leave your money in the account for 5 years, it will grow to $1,276.28*.
How Does Compound Interest Grow Over Time? An Example:
Lets say you invest $10,000 in a savings account that pays 5% interest compounded annually. This means that you earn interest on your original investment of $10,000, plus interest on the interest youve already earned.
After one year, youll earn $500 in interest. This brings your total balance to $10,500.
The following year, youll earn interest on your new balance of $10,500. This will be $525, which is more than you earned in the first year because youre earning interest on interest.
This process continues over time, and your balance will grow at a faster and faster rate in dollar terms. After 10 years, your balance will be $16,288.
Heres a compound interest table table showing how your balance would grow over time:
Conclusion
Understanding compound interest is crucial for anyone seeking to make their money work harder for them. So start early, stay invested, and let compound interest help you create a potentially brighter financial future.