What is Compound Interest?
Compound interest is the result of multiplying the initial investment by a fixed percentage for a fixed number of time periods. It is known to be an exponential process and its effects are not linear.
There are 2 ways a person can earn interest on money: by earning interest on the principal and the interest earned on interest. When you earn interest on the principal only, that is called simple interest. However, when you earn interest on both the principal and on any interest accrued, that is called compound interest.
Compound interest is a financial term that describes the interest applied to both the principal and the accrued interest. This means that as you earn interest on your invested funds, the accumulated interest also earns more interest. The amount of compound interest can be calculated by multiplying a continuously compounded rate, or APR, by the balance of an account. It is important that you understand how compound interest works so you can take advantage of its benefits.
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