What is compound interest?
Compound interest is interest earned on your original money and also on the interest it has already earned. Because the interest itself starts earning interest, a balance grows faster over time than it would with simple interest.
Action level No action usually needed
- Why you are seeing it
- It comes up with savings, investments and debts, wherever interest is added to a balance.
- Why it matters
- Because interest itself starts earning interest, a balance grows faster over time than with simple interest, and time matters as much as the rate.
- What should I do?
- Remember that it works in both directions: a debt grows the same way when interest is added to a balance you do not pay down.
- Treat any calculation of it as an estimate, because it assumes the rate never changes and nothing is added or taken out.
- A common misunderstanding
- It is not only about savings: the same effect makes a debt grow when interest is added to a balance you do not pay down.
See your money grow (an estimate)
Change the starting amount, the rate, the years or how often interest is added.
$10,000.00 would grow to about $33,102.04 ($23,102.04 of interest).
- With compounding
- $33,102.04
- With simple interest (no compounding)
- $22,000.00
- Extra from compounding
- $11,102.04
- APY
- 6.17%
| Year | Balance | Interest so far |
|---|---|---|
| 1 | $10,616.78 | $616.78 |
| 5 | $13,488.50 | $3,488.50 |
| 10 | $18,193.97 | $8,193.97 |
| 15 | $24,540.94 | $14,540.94 |
| 20 | $33,102.04 | $23,102.04 |
- An estimate that assumes the rate never changes and nothing is added or taken out. Real returns vary, and this is not a prediction or advice.
An estimate for learning, under the assumptions shown. Not financial advice, a quote or an offer.
How it works
Each time interest is added, the balance gets bigger, and the next interest is worked out on that bigger balance.
The formula is A = P × (1 + r ÷ n)^(n × t). P is the starting amount, r the yearly rate as a decimal, n how many times a year interest is added, t the number of years, and A the balance at the end.
A simple example
$10,000 at 6% for 20 years, interest added monthly
With simple interest: $10,000 × 6% × 20 = $12,000 of interest, a balance of $22,000.
With compounding monthly: about $33,102.04.
The extra $11,102.04 is interest earned on interest.
Why it matters
- Time matters as much as the rate: the longer money compounds, the larger the part of the balance that is interest on interest.
- It works in both directions. The same effect makes a debt grow when interest is added to a balance you do not pay down.
- The calculation assumes the rate never changes and that nothing is added or taken out. Real accounts and investments vary, and returns are not promised.