Calculate compounded growth on your investment.
Albert Einstein famously (and apocryphally) called compound interest the "Eighth Wonder of the World."
Unlike Simple Interest, where you only earn money on your initial deposit, Compound Interest means you earn money on your initial deposit and on the interest you have already earned. Over long periods, this creates an exponential growth curve.
The standard mathematical formula used in finance is:
A = P(1 + r/n)^(nt)The variable n (compounding frequency) is highly critical. If your bank compounds Annually, they calculate your interest once at the very end of the year.
If they compound Daily (n = 365), they calculate a tiny fraction of your interest every single day, and immediately add it to your balance. Because your balance is technically slightly higher every single day, you earn slightly more money tomorrow than you did today. Over 30 years, the difference between Annual compounding and Daily compounding can result in thousands of dollars in extra returns for the exact same interest rate.
What is the primary difference between Simple Interest and Compound Interest?