Compound Interest

Compound interest is the process where interest is calculated on both the initial principal and previously earned interest, allowing investments to grow exponentially over time. It’s commonly referred to as the “magic of compounding” in investing.

Formula for compound interest:

Where:

• A = Final amount
• P = Initial principal
• r = Interest rate
• n = Number of times interest compounds per year
• t = Number of years

For example, a $10,000 investment at a 7% annual return, compounded annually for 30 years, grows to $76,122—far more than the $10,000 contributed. 

The earlier an investment starts, the more time compounding works in its favor.