Compound interest is the math of growth. It is interest earned on interest, in addition to the principal deposit. This compounding effect allows your money to grow at an accelerating rate over time.

The Formula

The standard formula for compound interest is:

A = P \left(1 + \frac{r}{n}\right)^{nt}

Where:

  • A = final amount (future value)
  • P = principal deposit
  • r = annual interest rate (decimal)
  • n = number of times interest compounds per year
  • t = time period in years

Compounding Frequency Impacts

The frequency of compounding determines how quickly interest accumulates:

  • Annually (n = 1): Compounded once a year.
  • Quarterly (n = 4): Compounded four times a year.
  • Monthly (n = 12): Compounded twelve times a year.
  • Daily (n = 365): Compounded every day of the year.

The higher the frequency, the greater the future value of your investment.