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The Magic of Compounding Interest

Magic hatThe more frequently your money earns interest, the faster and bigger your balance will grow. As interest is added to your account, you earn interest on the original balance, plus the previously earned interest. 

The final return on your money is called the Annual Percentage Yield (APY). 

When interest is compounded, the amount paid in a year actually is more than the simple interest rate that is given. Financial institutions show the return as the APY — the actual return on an investment when compound interest is taken into account.

Watch this video from Khan Academy to learn more about compound interest. Click here to watch on YouTube.


Source: This video is content of the copyright holder. Any reference to a specific company, commercial product, process or service does not constitute or imply an endorsement or recommendation by Smart About Money.


Use this calculator to see how compound interest adds up. 

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