Economics
Compound Interest
Quick fact
Compound interest is often referred to as the 'eighth wonder of the world' because it has the power to turn modest sums into substantial wealth with time.
Why this is interesting
Did you know that a small amount of money left untouched can grow into a large sum over time? It's not magic—it’s compound interest.
Read the full explanation
Understanding Compound Interest
Imagine you save $100 in a bank account that gives 5% interest per year. After one year, your money grows by 5%, so you have $105. But with compound interest, next year’s interest is calculated on the new amount of $105—meaning you earn more than before.
A deeper explanation
Compound interest works because it allows earnings to generate additional earnings over time. The formula for calculating compound interest is A = P(1 + r/n)^(nt), where: A is the final amount, P is the principal, r is the annual interest rate, n is the number of times interest is compounded per year, and t is the number of years. This compounding effect leads to exponential growth rather than linear.