Compounded Interest help

[Keebs]

Hi:

I am working on a homework problem that requires me to find the amount of money that must be saved over 20 years in order to total $1M. I am given an interest rate of 5%, compounded annually and the initial year 0 principle payment. I think I know how to set up the problem, but I don't understand how to deal with the compounded interest. Can someone explain to me compounded interest? Thank you.

 

[JeffM]

Hi:

I am working on a homework problem that requires me to find the amount of money that must be saved over 20 years in order to total $1M. I am given an interest rate of 5%, compounded annually and the initial year 0 principle payment. I think I know how to set up the problem, but I don't understand how to deal with the compounded interest. Can someone explain to me compounded interest? Thank you.

All compounded interest means is that the after a certain period (the compounding period) the interest is added to the previous principal for purposes of computing interest.