how does compound interest work.

Question

how does compound interest work.

In: Economics

Answer 1

Compound interest is when you include the interest earned to the principle (initial money put in) when calculating future interest.

It’s a bit easier to understand with an example: say you put $100 in a bank account earning 20% interest, annually. After your first year you would have $120 ($100 x 1.2). Assuming you don’t take or add any money, after your second year you would then have $144 ($120 x 1.2)