One of the most powerful concepts in investing is compound interest. Compound interest is the interest calculated on the initial principal and also on the accumulated interest from previous periods. It’s often described as “interest on interest” and can lead to exponential growth over time. The frequency with which interest is compounded plays a crucial role—the more frequently it’s compounded, the greater the growth.

Here’s the compound interest formula:

FV=PV×(1+n×r)^(n×t)

Where:

• PV = principal amount / starting amount
• r = annual interest rate
• n = number of times interest is compounded per year
• t = number of years
  
  

Understanding compound interest is essential because it shows how small, regular investments can grow significantly over time. For example, if you invest €1,000 at an annual interest rate of 5% compounded annually, after 10 years, your investment will grow to approximately €1,628.89.