Skip to Main Content
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.

FINANCE GUIDE: COMPOUND INTEREST

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.

INTRODUCTION

In a world full of finances, any person can benefit from learning what interest is, how it applies in certain backgrounds, and how to calculate it. For example, taking out a loan to cover expenses could produce a lot or a little interest depending on the interest rate and how the person calculates the amount. Understanding simple interest vs. compound interest could save you money or earn you more money.

WHAT IS COMPOUNDED INTEREST?

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.

COMPOUNDED INTEREST AS A FORMULA

CHECK YOUR KNOWLEDGE

TWO SCENARIOS

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.

HOW DO WE CALCULATE COMPOUNDED INTEREST?

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:

RATE THIS GUIDE