Yhdistelmäkorko

Yhdistelmäkorko, or compound interest in English, is a fundamental concept in finance that describes the process of earning interest on both the initial principal amount and the accumulated interest from previous periods. This means that over time, the growth of an investment or loan accelerates because the interest earned also starts earning interest.

The effect of compound interest is often described as "interest on interest." It is a powerful force for wealth accumulation when investing, as even small amounts invested regularly can grow significantly over long periods due to this compounding effect. Conversely, for borrowers, compound interest can increase the total amount owed on a loan, especially if interest is compounded frequently.

The formula for compound interest is A = P(1 + r/n)^(nt), where A is the future value of the investment/loan, P is the principal investment amount, r is the annual interest rate (as a decimal), n is the number of times that interest is compounded per year, and t is the number of years the money is invested or borrowed for. The frequency of compounding (n) plays a significant role in how quickly the amount grows. More frequent compounding, such as daily or monthly, leads to faster growth than less frequent compounding, such as annually. Understanding compound interest is crucial for making informed financial decisions, whether saving for the future or managing debt.