Understanding Compound Interest
Compound interest means earning interest on your interest. Over time, it can grow your money significantly.
What is Compound Interest?
With simple interest, you earn a fixed amount each period. With compound interest, the interest you earn is added to the principal, so you earn interest on the growing balance. That growth accelerates over time.
The Formula
The standard formula is: A = P(1 + r/n)^(nt). A is the future amount, P is principal, r is the annual rate (as a decimal), n is how often interest compounds per year, and t is time in years.
📊 Use our Compound Interest Calculator to see how much you could earn.
Compound Frequency
Interest can compound yearly, quarterly, monthly, or daily. More frequent compounding means slightly higher returns. For example, 5% APR compounded monthly yields a bit more than 5% compounded yearly.
Why It Matters
- Savings — High-yield accounts and bonds use compound interest
- Investments — Long-term growth in stocks and ETFs compounds
- Debt — Credit cards and loans compound against you, so pay them down
For informational purposes only. Not financial advice.