Compound Interest

Learning Compound Interest

What Is compound Interest

Interest earned on both your original money and the interest you've already earned.

What is the principal?

The amount of money you start with

What does r represent

The interest rate, written as a decimal

What does n represent?

The number of times interest is compounded

What is the basic compound interest formula

A=P(1+r)^n

What does A represent?

The final amount of money

What does P represent

The starting amount (principal)

What does 1+r represent

The growth factor for one compounding period

If the interest rate is 10% what is r

0.10

If you invst 1000 at 5% for 3 years, what is the formula

1000(1.05)³

What is the difference between simple interest and compound interest.

Simple interest only earns interest on the original amount. Compound interest earns interest on the accumulated amount.

What happens to your money each compounding period

It is multiplied by 1+r

What does “compounded annually” mean?

Interest is added once per year

What does compounded monthly mean?

Interest is added 12 times per year

If interest is compounded monthly, what happens to the rate?

The annual rate is divided by 12.

What is the formula when interest compounds m times per year?

A=P(1+r/m)^mt

What does t represent

Time in years

What happens if you leave money invested for longer?

Compound growth becomes increasingly powerful.

Why does compound interest grow so quickly?

Because the interest itself starts earning interest.

What is the most important thing to understand about compound interest?

Money grows fast because each period's growth becomes part of the base for the next period.