How Is Compound Interest Calculated?

Video Transcript

"Hi, this is Matt McKillen with Innovative Financial Group. The question today that was posed to me is how is compound interest calculated? Compounding interest is really a long term benefit to an investor. To give you an example, if you were to put your money into an IRA or CD and you were to just let that interest that you receive every year, even if it's only 3 or 4%, rollback into the amount you have in your account, then what happens is over the period of the investment, and it could be 10 years or 15 years or 20 years, you start making interest on the interest that you've already collected. Now I've seen examples in the past where if someone was just to put in let's say 500 dollars or 300 dollars a month into some type of savings vehicle and then never touch the interest that's coming out, it's amazing over the long term and the longer that you hold the money in that type of account, the more benefit you get from the compounding interest, but you can sometimes take something that maybe went in at 300 dollars a month with a principal balance of 10,000 dollars in a period of 20, 30 years you could end up with 60, 70, 80, 90,000 dollars in the account. So basically again, compounding interest is interest being paid on interest you've already earned. My name is Matt McKillen, I'm with Innovative Financial Group."