Compound Interest

Compound interest is an interest rate on savings calculated using both the original principal and
interest that has accumulated from previous periods of savings. "Interest on interest," or the ability of
compound interest, causes an amount to increase faster than simple interest, which is computed just on
the principal amount. Money multiplies more quickly when compounded. The greater the number of
compounding periods, the higher the compound interest. Compound interest can benefit your investments
while making debt repayment harder to accomplish.
But how does compound interest work? Compound interest is computed by multiplying the
starting principal amount by one and raising the annual interest rate to the number of compound periods
minus one. The total initial principal or amount of the loan is then deducted from the final value.
Compound interest is the sum of the interest and principal in the future (or future value) minus the
amount of principal paid in the present (or present value). Compound interest comes with the formula of;
F=P(1+i)n
Where:
F is the future value
P is the principal amount
i is the interest rate
n is the number of periods
For example, the amount of Php 100,000 was deposited in the bank earning an interest of 5% per annum.
Determine the total amount at the end of 6 years, if the principal and interest were not withdrawn during
the period.
By applying the formula of compound interest, we will get:
F = P (1 + i)n
5 6
F = 100,000(1 + )
100
F = 100,000 (1 + 0.05)6
F = 100,000 (1.05)6
F = Php 134,009.56

Compound interest is capable of substantially improving long-term investment profits. Over ten
years, a Php100,000 deposit earning 5% simple annual interest would earn Php50,000 in total interest.
However, if the identical deposit had a monthly compound interest rate of 5%, the interest would total
around $64,700. Compound interest is interest-on-interest, whereas cumulative interest is the sum of all
interest payments. Some banks additionally provide continuous compounding interest, which adds interest
to the principal as frequently as possible. In practice, it doesn't collect much more than daily
compounding interest as long as you deposit money in and take it out on the exact same day.
There are several advantages and disadvantages of compound interest. Some of its advantages
are: First, it can help develop wealth long-term through savings and investments, meaning compounding
is beneficial to your assets and savings since your returns earn returns. Second, it reduces the danger of
wealth deterioration since compounding interest's exponential growth is particularly helpful in moderating
wealth-eroding causes like rising living costs and inflation, which decreases purchasing power. Lastly,
compounding might help you with making debt repayments because when you spend beyond the required
payment, you can take advantage of compounding to save on total interest. But compound interest also
has disadvantages such as working toward consumers who make minimum payments on high-interest
loans or credit card bills, because if you simply pay the minimum, your balance could keep increasing
significantly due to compounding interest. This is how people end up trapped in the "debt cycle.". Next,
the returns are taxed since compound interest earnings are taxed at your tax bracket unless they are in a
tax-sheltered account. In addition, calculating is challenging meaning, calculating basic interest is simple,
but calculating compound interest involves additional mathematical computation.
Compound interest has a significant impact on savings and investments over time. Compound
interest is an important aspect of wealth accumulation since it grows money significantly quicker than
basic interest. It also helps to minimize the growing expense of living caused by inflation.