| Upon initial glance, you may look at the term | | | | -r = annual interest rate |
| "compound interest" and become confused. Hopefully | | | | -n = number of years interest is collected |
| the following information will help clarify this term and | | | | It is important to note that if the interest is being |
| make your financial planning easier. | | | | compounded more often than once per year, the |
| "So, what is compound interest?" you ask. Compound | | | | value for "r" is divided by the number of times interest |
| interest is the interest collected on the principal amount | | | | is being compounded (i.e. if monthly, with an interest |
| of the deposit, as well as the interest already added | | | | rate of 5%, it would be 5/12). |
| onto the principal during past payments. In other words, | | | | As previously mentioned, compound interest adds |
| every time that interest is added, or compounded, onto | | | | additional interest money to the interest that was |
| the principal amount, it creates a new amount that will | | | | already paid. Therefore, with time, you will be collecting |
| be further compounded next time a collection dates | | | | money simply by having your money deposited in an |
| arrives. Simply put, compound interest applies to the | | | | account. |
| entire amount, not just the principal. Because of this, | | | | Compound interest often works the same with loans, |
| over time, money slowly accumulates and the total | | | | which means that the longer it takes you to repay the |
| amount of the account increases. Consequently, the | | | | loan, the more you end up paying. This usually works |
| amount due on the payment date increases as well. | | | | as a major incentive for borrowers to repay their |
| Compound interest is most commonly found in savings | | | | debts as quickly as possible to save money. |
| and checking accounts, along with interest due on | | | | As is the case with most financial situations, it is |
| loans. | | | | important to take your time. Shop around and explore |
| There is a simple mathematical formula used for | | | | your options to find the best compound interest rates. |
| calculating compound interest, which is: | | | | This applies to both accounts and loans. Remember to |
| A = P(1 + r)n | | | | request quotes from multiple sources, so that you can |
| -A = amount accumulated after interest in | | | | effectively compare the rates offered and choose the |
| compounded | | | | best one according to your situation. |
| -P = principal | | | | You may reprint this article with the URL links intact. |