 TITLE: How Does Compound Interest Work? CONTENT: What Is the Formula for Compound Interest?\n------------------------------------------\nThe compound interest formula is:\nA = P(1+r\/n)nt\n*   **P** is the principal (the starting amount)\n*   **r** is the annual interest rate, which is written as a decimal\n*   **n** is the number of times the interest compounds each year\n*   **t** is the time, or total number of years\n*   **A** is the total amount you will wind up with at the end of the timeframe\nFortunately, you don't need to be a math whiz to put the formula to work. You can use one of the many online calculators to figure out how much interest will accrue and how compounding can impact your savings or debt. However, the formula can offer insight into how compounding works.\nWhether you're saving or borrowing money, you may already know the amount you'll start with (P) and your timeframe (t). As a result, there are two variables to consider as you compare your options—the interest rate (r) and compounding frequency (n).\nThe impact of a higher or lower interest rate is fairly straightforward. A higher rate means more interest gets added each cycle.\nSimilarly, the more often interest compounds, the faster the growth. For example, here's how different frequencies impact the growth of $1,000 with a 10% interest rate.\nCompounds daily\nCompounds monthly\nCompounds annually\nAfter one year\n$1,105\n$1,105\n$1,100\nAfter two years\n$1,221\n$1,220\n$1,210\nAfter five years\n$1,649\n$1,645\n$1,611\nAfter 10 years\n$2,718\n$2,707\n$2,594 END