What is Compound Interest?
Compound Interest Definition
Compound interest is earning interest on top of interest. When you invest money, you’re expecting to get a return on your money, meaning that you should end up with more money than you originally put in.
If you leave that money alone (the initial principal plus the interest), compound interest applies the interest rate to the total new amount of money earned, so that it builds exponentially over time.
Compound Interest Examples
Let’s look at how to use a simple example of a compound interest formula:
Year 1: 100 dollars saved with 10% interest per year is $110 dollars.
Without the compound interest formula applied:
100 dollars saved in year two earns you again $110 – so now you have $120 dollars in total.
Now let’s look at this using the compound interest calculator.
Enter in the 100 and choose 10% interest and two years. How much more did you earn?
Conclusion: Your compound interest with deposits earns more money month over month, year over year.
Find out more about how to use compound interest to accelerate your wealth by contacting us at 101 Financial.