Compound interest is a powerful financial concept that allows your savings to grow over time. It works by earning interest on both the initial amount you deposit (the principal) and the interest that accumulates. This means that over time, your savings can grow significantly, especially with higher interest rates and longer investment periods.
Here's how compound interest is calculated:
You start with an initial amount called the principal.
Each year, your savings earn a certain percentage of interest, which is added to your principal.
As time goes on, you not only earn interest on your original principal but also on the interest that has already been added to your savings. This is what makes it "compound" interest.
The mathematical formula for compound interest is:
A = P(1 + r/n)^(nt)
A represents the final amount of money, including interest.
P is the principal amount (the initial amount of money).
r is the annual interest rate (in decimal form).
n is the number of times that interest is compounded per year.
t is the number of years the money is invested or borrowed for.
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