I struggle with compound interest
ScanSolve AI Answer
Answer
Compound interest is interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods. It's essentially "interest on interest."
Step-by-step solution
2 stepsHere's a simple example:
Imagine you deposit $1000 into a savings account with a 5% annual interest rate, compounded annually.
After the first year, you earn 5% of $1000, which is $50.
Your total is now $1050.
In the second year, you earn 5% interest on the new total of $1050. This is $52.50.
Your total is now $1102.50.
Notice that you earned more interest in the second year ($52.50) than in the first year ($50) because the interest was calculated on a larger amount. This is the power of compound interest.
The formula for compound interest is:
A = P(1 + r/n)^(nt)
Where:
A = the future value of the investment/loan, including interest
P = the principal investment amount (the initial deposit or loan amount)
r = the annual interest rate (as a decimal)
n = the number of times that interest is compounded per year
t = the number of years the money is invested or borrowed for
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