What is Compound Interest ?

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Compound interest (or compounding interest) is interest calculated on the initial principal and which also includes all of the accumulated interest of previous periods of a deposit or loan.

Thought to have originated in 17th century Italy, compound interest can be thought of as “interest on interest,” and will make a sum grow at a faster rate than simple interest, which is calculated only on the principal amount.

We all like the thought of earning interest on our savings and investments. Equally, we all hate having to pay interest on loans and debts. With some deft mathematical footwork it's possible to cancel out the interest on your debts by using the compound interest that accumulates on your savings.

The rate at which compound interest accrues depends on the frequency of compounding such that the higher the number of compounding periods, the greater the compound interest.

Thus, the amount of compound interest accrued on $100 compounded at 10% annually will be lower than that on $100 compounded at 5% semi-annually over the same time period.

When you take out a loan, interest is calculated for the first period (be it a month or a year). This interest is then added to the original total.

This seems like a good time to feature a diagram to help demonstrate the power of compound interest in a positive way.

Compound interest is calculated by multiplying the initial principal amount by one plus the annual interest rate raised to the number of compound periods minus one.

Because compound interest also takes into consideration accumulated interest of previous periods, the interest amount is not the same for all three years (as it would be with simple interest).

When calculating compound interest, the number of compounding periods makes a significant difference. The basic rule is that the higher the number of compounding periods, the greater the amount of compound interest.

If it's been a while since your math class days, fear not: There are handy tools to help figure compounding.

The first way to calculate compound interest is to multiply each year's new balance by the interest rate.

A third way to calculate compound interest in Excel is to create a macro function.

The second way to calculate compound interest is to use a fixed formula.

A number of free compound interest calculators are offered online, and many handheld calculators can carry out these tasks as well.

The free compound interest calculator offered through Pine-Grove.com is simple to operate and offers compounding frequency choices from daily all the way to annually.

Compound interest (or compounding interest) is interest calculated on the initial principal and which also includes all of the accumulated interest of previous periods of a deposit or loan

the amount of compound interest accrued on $100 compounded at 10% annually will be lower than that on $100 compounded at 5% semi-annually over the same time period. Because the interest-on-interest effect can generate increasingly positive returns based on the initial principal amount, it has sometimes been referred to as the "miracle of compound interest."

Compound interest is calculated by multiplying the initial principal amount by one plus the annual interest rate raised to the number of compound periods minus one

Because compound interest also takes into consideration accumulated interest of previous periods, the interest amount is not the same for all three years (as it would be with simple interest).

The first way to calculate compound interest is to multiply each year's new balance by the interest rate.

The second way to calculate compound interest is to use a fixed formula. The compound interest formula is ((P*(1+i)^n) - P), where P is the principal, i is the annual interest rate, and n is the number of periods.

A third way to calculate compound interest in Excel is to create a macro function. First start the Visual Basic Editor, which is located in the developer tab. Click the Insert menu, and click on Module.

Compounding can also work for you when making loan repayments. Making half your mortgage payment twice a month,