## How does compound interest work?

You might be wondering how to calculate compound interest?

Let's get straight to the point by analyzing the formula for annually compounded interest:

Vf = Vi × (1 + ρ/n)^(n×t)

The compound interest formula, expressed by Vf = Vi × (1 + ρ/n)^(n × t), describes how an investment or loan grows over time.

In this formula:

`Vf`

is the future value of the investment.`Vi`

represents the initial value or principal amount.`ρ`

(rho) is the annual interest rate (expressed in decimal form, so a rate of 5% would be 0.05).`n`

is the number of times interest is compounded per year.`t`

is the number of years the money is invested or borrowed.

The calculation of compound interest differs from simple interest in that it calculates interest not only on the initial principal but also on the interest accumulated in previous periods, resulting in exponential growth of the invested capital over time.