How to Calculate Compound Interest

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Compound interest is interest earned on both your principal and accumulated interest. It is the most powerful force in investing.

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Step-by-Step Guide

  1. Identify principal (P), rate (r), frequency (n), and time (t)
  2. Formula: A = P(1 + r/n)^(nt)
  3. Annual compounding: A = P(1 + r)^t
  4. Continuous: A = Pe^(rt)
  5. Subtract principal to get interest earned

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Frequently Asked Questions

Simple vs compound interest?

Simple is on principal only. Compound grows on principal plus accumulated interest.

How often should it compound?

More frequent (daily vs annual) yields slightly more. Daily earns about 0.05% more.

What is the Rule of 72?

Divide 72 by your rate to estimate doubling time. At 8%, about 9 years.

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