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Compound Interest Formula

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Compound Interest Formula

When adding annual additions to the compound interest formula, you account for the fact that you're not only earning interest on your initial principal but also on the additional contributions you make at the end of each compounding period. This is common in scenarios like saving for retirement, where you might contribute to your investment account annually.

The formula to calculate the future value of an investment with annual additions is a bit more complex than the basic compound interest formula. It combines the future value of a series (the annual contributions) with the future value of a single lump sum (the initial principal). The formula looks like this:

Where:

  • A is the amount of money accumulated after

  • n years, including interest.

  • P is the principal amount (the initial amount of money).

  • r is the annual interest rate (decimal).

  • n is the number of times that interest is compounded per year.

  • t is the time the money is invested for in years.

  • PMT is the annual addition.

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