**Compound interest** is one of the most powerful “weapons” in the field of **finance,** It can, however, be a “double-edged sword”. In fact, mathematician Albert Einstein argued that **Compound interest** It’s the eighth wonder of the world Whoever understands it benefits and whoever doesn’t understand it pays for it.

This is because using **Compound interest** can allow us in our favor **make big profits,** Whereas, if we have something against us, for example, when we refinance a loan, we can repay it by repaying **Big amount**

Compound interest allows us to get large sums of money over time

## What is written interest?

we can define **Compound interest **such as one. created by the appointment of **Capital **What **earns interest **And then these interests generate new ones.

In simple terms, we can say that **Capital earns fixed interest**but when he **renewal** It does this for both the principal and the interest we generate.

To clarify the concept, we can see it in an example. If we have $100 and invest it in an instrument that pays 10% per month, we will get $110 per month, which is basically $100 in principal and $10 in interest. **If we decide to upgrade the total**Next month we will receive $10 corresponding to $121, $100, of the initial capital **interest **$11 for the first month and this second month.

as we can see, the second month we received more **interest **that even if in the first **Interest rate** remains the same: ten%.

This is because the interest generated was not on $100, but on $110. That is, we earned $10 in interest on the original $100, but we also earned $1 in interest on the $10 in interest we earned last month.

Compound interest generates interest on interest, creating a “snowball” effect in which more and more money is generated.

it is **Compound interest** ends generating that the real rate reached in one year is very high this rate **nominal interest.**

the same thing happens with **Ready:** As we accumulate debt, we generate **interests **on the interest generated **very high rate**to have an impact **“Snowball”** Which makes it hard to get out sometimes.

## What is compound interest and how is it calculated?

As we mentioned in the previous paragraph, **Compound interest** the one who is born on **interests **who were born before,

For **calculate it** There are different ways, although the easiest is **compound interest calculator **that can be found by browsing the internet.

Currently, on the Internet, it is quite easy to find compound interest calculators.

However, if we want** manual calculation **We can use the following formula:

The letter “CF” in this case stands for “**capital final**», ie the capital that we will receive at the end of the period. On the other hand, the letter “CI” is **starting capital **Then, in the case of “i”, it is** interest** we get and at the end “n” is **Condition** Hey** number of periods** that we will place **Pennies.**

## How to understand compound interest?

for understanding **Compound interest **We need to understand its characteristics. First, what is special **Compound interest **This is **starting capital** It increases each period as interest is added and this increases.

another one, **interests **are shaped **Increasing **Why? Interest accrues on capital that changes over timethat’s it **Increases per additional units of currency added**,

ultimately **interest increases** In each period, so the longer the period, the more interest we generate.

On the other hand, we must understand that although it can be applied in our favor **make profit **It can also work against us in case of debt, for which we must always try to pay our obligations on time.

It must be remembered that for **Compound interest** with **In force** we need to update the operation total, Going back to the $100 example, we can’t just rollover $100, but $110, because if we do it for $100, we won’t get the $10 interest we generate and so, c ‘Is simple. interest will be.

## Simple and compound interest: example of each

we can define **simple interest** By way of profit or interest that a . is obtained by placing **pennies **for a certain period. **interests **Those which accumulate in each period are equal to those of the preceding periods, because the capital is constant, ie it does not vary.

In these cases, take **capital to invest** and multiply it **interest. **The interest by which it is multiplied is the interest for the period to be invested. For example, let’s say we have $100 and it earns us 5% monthly interest and we plan to invest our money for a year.

In this case, we take 5% and multiply it by 12, giving us a total of 60%. In this example, let’s take $100 of **Capital **And we multiply that by 60%, getting $160 after one year, $100 of initial capital and $60 of **interests,** From each month it will generate $5.

With a fixed mandate, we can obtain simple interest or compound interest if we renew the total

it is** type of interest** It is usually given in some functions **long term **of **single capitalization** or in cases where they are removed from time to time **interests. **

a clear example of **simple interest **and of **Compound interest** happens in **fixed deadline. **If we put $1,000 over a period of time with a nominal annual rate of 53%, we get $1,530 (if we withdraw the interest each month, that is, about $44 of the “profit” that we obtain).

However, if we choose **Transfer principal and interest each month**, the rate goes from 53% to 68%, i.e. an additional 15%. In this case, if we choose to withdraw the interest periodically, we will receive $1,680, or approximately $150 more.