September 12, 2024
Simply put, compound interest is the interest you earn on your interest. This supercharges your savings, as you’re earning interest on your principal balance and interest on the interest you’re earning. As the years go by, compound interest will continue to grow your savings.
At the end of a compounding period, your interest is added to your principal balance. Therefore, in each compounding period, the amount of money accruing interest is larger than in the previous period, resulting in greater interest earnings.
Compound Interest Formula
If you enjoy math, here’s the equation for calculating compound interest:
𝐴=𝑃(1+𝑟𝑛)𝑛𝑡
𝐴=Final amount
𝑃=Initial principal balance
𝑟=Interest rate
𝑛=Number of times interest applied per time period
𝑡=Number of time periods elapsed
However, the rest of us will probably prefer using an online calculator, such as the one provided online by the SEC. Microsoft Excel users also have several formulas available.
Just as compounding can work in your favor, it can also work against you if you have debt with compounding interest. In most cases, loans such as mortgages, auto loans, and personal loans have simple interest, meaning it doesn’t compound.
Credit cards, on the other hand, charge compound interest. If you feel like your credit card balance is fighting back, it’s because your credit card interest is compounding each day. In other words, your balance literally grows every day.1
Directors Mortgage is always ready to review your Real Estate strategy and discuss options to help you accomplish your goals.
1Source empower.com