I’ve discussed compound interest and exponential growth in numerous posts:here,<\/a> here,<\/a> and here.<\/a> However, the focus has been on annual compounding, given by<\/p>\n A=P(1+r)^t<\/p>\n where A=accumulated amount, P=principal (the amount invested), r=annual interest rate in decimal form, and t=time in years.<\/p>\n Just to clarify: when interest is compounded, it becomes part of the principal. Then it, too, can start earning interest.<\/p>\n What about monthly compounding, which is applied to many charge accounts, etc? How is it calculated? The general formula is then used:<\/p>\n A=P(1+r\/n)^(tn)<\/p>\n where n=number of compounding periods per year. (For monthly compounding, n=12.)<\/p>\n Example:<\/strong> Calculate the balance of an investment of $500 left in an account for five years, if the interest rate is 3.1% compounded monthly.<\/p>\n Solution:<\/strong><\/p>\n Recall that 3.1% means 0.031.<\/p>\n A=500(1+0.031\/12)^(5(12))=583.71<\/p>\n Now let’s repeat the example, but with weekly instead of monthly compounding:<\/p>\n A=500(1+0.031\/52)^(5(52))=583.80<\/p>\n In today’s world of investing and credit, everyone needs to understand compound interest. I’ll bring more coverage of it in future posts:)<\/p>\n