How to Make Money With Compounding: What is Compounding Interest? Compounding Interest Explained. Compounding interest is the 8th wonder of the world. In this episode of Ask The Professor, Professor Milligan explains how to make money with compounding. Compound interest is a concept in finance where the interest earned on an investment or loan is added to the principal amount, and then the interest is calculated on the new total. In other words, it’s interest on interest. Here’s how it works:
- Principal: This is the initial amount of money invested or borrowed.
- Interest Rate: This is the percentage of the principal that is added to the principal over a certain period of time. It can be an annual, monthly, or any other frequency rate.
- Time: This is the duration for which the interest is calculated, typically expressed in years or fractions of a year.
With compound interest, the interest is calculated not only on the initial principal but also on the accumulated interest from previous periods. As a result, the amount of interest grows over time, and the total balance increases at an accelerating rate. Compound interest is often used in investments, where reinvesting the earned interest can lead to significant growth over time. It’s also important to understand in loans, where it can lead to higher total repayment amounts over time.
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