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COMPOUND INTEREST

investing wednesday word of the week Sep 04, 2018

Definition

Compound interest is interest added on to the principal on a deposit or loan so that the added interest also earns interest and so on and so forth.  

Why It's Important

I think Albert Einstein said it best, "Compound interest is the eighth wonder of the world.  He who understands it, earns it... he who doesn't... pays it."  If you start with $1000 in the bank and it gains 10% a year,  the breakdown would look like this:

Year 1: $1100
Year 2: $1210
Year 3: $1331
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That's compound interest!

For the technical people it's formula is 

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

 

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