Home » How to Save Money on Compound Interest – Definition & Formula

# How to Save Money on Compound Interest – Definition & Formula

Compound interest is known to be of the most powerful forces in the financial world. The ability to turn a small amount of money into a large amount of money is the foundation for many people’s financial dreams. However, compound interest is often misunderstood. The average person thinks that compound interest is only earned from investing in the market, but this is not the case.

Have you ever wondered how much money you would be able to save and make if you had invested a single dollar into a financial account when you were young? Or what you would be able to do with the compounded interest if you had just one more dollar to spare? The answer to these questions is simple: compound interest. Compound interest is the interest earned on the principal and the interest of previous investments, which is then used to make future investments.

In this article, we are going to discuss the formula for compound interest as well as a few examples to understand the topic well.

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## Do you Know What Simple Interests is?

Interest is the amount of money that is earned on an amount of money invested over a period of time. In simple terms, the more money that is invested, the higher the interest rate. This means that the money earned will be larger over a period of time. For example, if you invest \$1,000 today, you will earn interest on that amount.

The formula to find the simple interest is very easy!

Step 1: You just need to multiply the Principal, the rate of the interest that has been given in the question & the time period.

Step 2: The answer you get in Step 1 needs to be divided by 100 to get the simple interest.

## Compound Interest & Formula

Compound interest increases since it is added to prior periods’ accrued interest; it is, in other layman terms, it is defined as interest on interest. Compound interest is computed as follows:

P*(1+r) to the power of t – P is the compound interest formula.

P denotes the Principal amount

The period for which the interest is being charged is denoted as t whereas the annual interest rate is denoted as r.

## What Is the Difference Between Simple & Compound Interest?

The cost of borrowed funds or taking loans is named interest, and the borrower pays a charge to the lender in return for the borrowing or the loan.

Most of the time, the simple interest that’s paid or earned over a certain period of time is a predetermined percentage of the principal amount borrowed or the amount lent.

Borrowers should pay the interest on interest as well as principal since compound interest accumulates and is added to the cumulative interest from prior periods.