In compound interest, interest is figured upon the original sum plus the accrued interest of prior period/s. This translates into earning interest on your interest thus resulting in your saving growing at a compounding rate of return. The formula for compound interest is: A = P(1 + r/n)^(nt) where: A is the final amount P is the principal amount r is the interest rate n = Number of Compounding Periods per Year. It means that in two years.

• Suppose you invest, say $1,000 at a rate of 5 percent compounded yearly. At the end of year one, you’ll have made $50 in interest and your new total balance will be $1,050. Interest earned in the second year is $52.50 on a remaining balance of $1,050. And so on.
• The power of compounding is great over a prolonged period. Say, if you put $1000 at a rate of 5% per year compounded and reinvest the profits for 20 years, it’ll grow up to more than $3800.
• You can make use of compound interest in saving money towards retirement or any future prospectives. Although, it may also increase debt costs. The instance is where in case of having a high interest rate credit card; you will end owing more due to interest charges on the outstanding balances that are not settled completely in one month. Some tips for mutual funds.

Start saving early. The earlier you save, the longer your money has to grow.

Invest regularly. Saving even a small sum of money every month will build up eventually.

Invest in assets with high interest rates and compound interest.

Reinvest your earnings. You are therefore able to use your earnings as capital to purchase more investments in order to increase their expansion rate.