Compound interest refers to the interest accumulated on the principal amount, in addition to the interest from previous periods; this allows you to maximize your earnings on the principal sum. Interest can be compounded on any frequency schedule, whether it’s daily, monthly, or annual. The formula for compound interest is as follows:
A = P(1 + r/n)^nt
A = the total amount of money at the end
P = the principal amount invested or borrowed
r = the annual interest rate
n = the number of times interest is compounded within a specific time period
t = the number of these time periods that have elapsed
Compound interest can be an effective way to grow wealth over time, as the interest earned on the accumulated interest can compound and eventually grow exponentially. On the flip side, compound interest on debt can result in significant costs over time if the debt is not paid off quickly.