Compound Interest
Definition
Interest calculated on both the initial principal and the accumulated interest from previous periods, causing wealth to grow exponentially over time.
Formula
A = P(1 + r/n)^(nt)Compound interest is the mechanism by which interest is earned on both the original deposit and any previously earned interest. This creates an exponential growth effect that Albert Einstein reportedly called the eighth wonder of the world.
The power of compounding depends on three factors: the interest rate, the compounding frequency, and the length of time. A $10,000 investment earning 7% annually grows to about $19,672 in 10 years, $38,697 in 20 years, and $76,123 in 30 years, demonstrating how growth accelerates over time.
Compounding works both for and against you. While it builds wealth in savings and investments, it can also make debt grow rapidly. Credit card debt at 20% APR compounded daily can double in less than four years if left unpaid. Starting to invest early maximizes the benefit of compounding.
Related Calculators
Compound Interest Calculator
Calculate compound interest with contributions and visual growth chart
Savings Interest Calculator
Calculate savings account growth with compound interest, APY comparison, and inflation-adjusted projections
Investment Calculator
Calculate investment growth with monthly contributions and dividends
Related Terms
Simple Interest
financeInterest calculated only on the original principal amount, without compounding on previously earned interest.
APY (Annual Percentage Yield)
financeThe effective annual rate of return on an investment or savings account, accounting for compound interest.
Interest Rate
financeThe percentage charged by a lender on borrowed money or paid to a saver on deposited funds, expressed as an annual percentage.
Principal
financeThe original amount of money borrowed in a loan or the initial amount of money invested, excluding interest or returns.
Related Articles
How to Calculate Mortgage Payments: Complete Guide
Learn how to calculate your monthly mortgage payment with the amortization formula. Includes examples, tips for getting lower rates, and a free calculator.
Compound Interest Explained: How Your Money Grows Exponentially
Understand compound interest and how it makes your money grow exponentially. Learn the formula, see real examples, and discover strategies to maximize compound growth.
How to Pay Off Debt Fast: Snowball vs Avalanche Method
Learn the two proven strategies to pay off debt fast. Compare the debt snowball and debt avalanche methods with real examples and find which approach works best for you.
How to Calculate Net Worth: Assets, Liabilities & Benchmarks
Learn how to calculate your net worth step by step. Discover what to include as assets and liabilities, and see how your net worth compares to others your age.