subject: Compound Interest Formula: Investment Concept [print this page] The best use one can have with the compound interest formula is through computing your profits gained. It is the best example in a savings account. In this type of investment, the one saving money is ensured that the money they use to save is well secured in the monetary institution. It is also a plus that not only is the money secured, it also gains interest for a given period of the investment. Using the compound interest formula, the user will be able to compute the profit to be gained from a certain savings account. What the cycle does is adding interest over interest plus the principal amount. Through this, one can earn more than is expected especially if the principal amount gets higher.
The Compound Interest Formula Used In Savings Account:
In a savings account, the formula that is used to compute for the profits is also the standard compound interest formula.
A = P (1 + r/n)nt
With this compound interest formula, one will be able to solve for the total amount of profits to be gained as the A variable.
The P variable in the formula is the principal amount or the initially deposited amount. Through time, the principal amount gets bigger due to the interest that is added over time.
The r variable in the formula is the yearly rate of interest in the savings account. This plays a vital part on how much you will earn. The bigger the rate is, the larger the profit will be when the interest compounds.
The n variable in the compound interest formula is the number of compounding. It is the time wherein the interest gets compounded in a yearly basis, as well. The frequent the compounding is, the larger the profit will be.
The concept behind the investment and the compound interest formula:
By using the compound interest formula, one may notice that it has a certain concept to it. It is known as the compound interest. It is best used when saving or investing on something rather than in loan or borrowing money. Investing a certain amount of money in the bank will not only help in saving up for the future. It also makes the money in the account larger through interest. Using the compound interest formula, one will learn that the frequent the compound is, the better. The usual periods are done every day or every month. For daily compounding, the easier the gain is because interest is added to the account every day.
