How Compound Interest Works

What compound interest means

Compound interest means interest is added to the balance, and future interest is calculated on the new balance.

Basic formula

Future value = principal × (1 + rate ÷ compound periods)^(compound periods × years).

Simple example

If 1000 grows at 5% per year for 3 years, the balance becomes more than 1150 because each year interest is added to the previous balance.

Practical use

Compound interest is used for savings, investments, loans and long-term financial planning.

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