Compounding interest means the accrued interest is added to the principal and then interest is accrued on the original principal plus previously accrued interest. For example, $100 deposited for a year at 6% interest will become ($100 x 1.06) $106 after one year, which will become ($106 x 1.06) $112.36 after two years. In the second year, interest is more than the $6 from year one because in year two, interest accrues on $106 rather than just $100.
The basic formula to calculate how much has accrued with compounding interest is X = $1 x (1 + i)n.
X = amount on deposit.
$1 = the original amount deposited.
i = interest rate per period expressed as a decimal.
n = the number of compounding interest periods.
In this example, $1000 = the amount deposited, the interest rate is 6% or 0.06, and the periods (n) = 20.
X = $1,000 x (1.06)20
X = $1,000 x 3.207135472
X = $3,207.14
