Compound Interest — Financial Glossary

What is compound interest?

Compound interest is interest calculated on the initial principal and on the accumulated interest of previous periods. It is often called "interest on interest" and is the reason your savings can grow exponentially over time.

The formula

A = P(1 + r/n)^(nt)

Where: A = final amount, P = principal, r = annual rate, n = times compounded per year, t = years.

Example

$10,000 at 5% compounded monthly for 10 years:

A = 10000(1 + 0.05/12)^(12×10) = $16,470.09

That's $6,470 in interest — compared to only $5,000 with simple interest. The longer you invest, the more powerful compounding becomes.

Try our Savings Calculator to see compound interest in action.