It looks like you're using Internet Explorer 11 or older. This website works best with modern browsers such as the latest versions of Chrome, Firefox, Safari, and Edge. If you continue with this browser, you may see unexpected results.

This guide will cover important topics like simple interest, compound interest, consumer price index (CPI), and the tax system in America. Gaining an understanding in these topics can help you manage your finances more efficiently.

Compound Interest is the total amount of interest and principal amount reinvested over multiple time periods.

In other words, at the end of a time period your interest is added to your principal amount and then that amount becomes reinvested over and over again based on the time period in years.

The chart below shows how much more money is created when using compounded interest compared to simple interest.

Here are two scenarios that can apply to compounded interest.

**1. Borrow/Get a Loan**

Borrowing money with a compounded interest rate is bad! Very Bad! Over time, you must pay a lot more back to the bank since the amount exponentially increases.

**2. Invest**

Investing money with a compound interest rate is amazing! Very Amazing! Take the opposite of what was said above. Your money will exponentially grow and you will be rewarded with more money than a simple interest rate.

*Remember: The compound interest formula does not yield interest because it is the principal amount AND the interest.*

Here’s a quick example without any context: