Investing & Markets

What is Compound Interest?

Compound interest is interest earned on interest. Your money grows faster because each period’s interest gets added to the principal. It is the concept of earning interest on interest, causing savings balances to grow at an accelerating rate over time. The compounding frequency (daily, monthly, quarterly, or annually) affects the speed of growth.

The mathematical formula for compound interest is: A = P(1 + r/n)^(nt), where 'A' is the final balance, 'P' is the principal, 'r' is the annual interest rate, 'n' is the compounding frequency per year, and 't' is the time in years. More frequent compounding results in higher returns.

Compound interest is the foundational driver of retirement savings. Over long investment horizons (20 to 40 years), compound interest causes investment portfolios to grow exponentially, turning small, regular contributions into substantial retirement balances.

Quick Facts

Growth CurveExponential growth over long time horizons

Compounding FrequencyDaily, monthly, quarterly, or annual compound intervals

Key VariablesTime, interest rate, and compounding frequency

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

PRACTICAL EXAMPLE

An investor deposits $10,000 at a 7% annual interest rate. With simple interest, they earn $700 annually ($21,000 total in 30 years). With compound interest compounded annually, the balance grows to $76,122.55 over 30 years, earning $66,122.55 in interest.

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Learn More Key Concepts

StockA financial security representing a fractional share of ownership in a corporation, conveying voting rights and claims on assets.

BondA debt security representing a loan made by an investor to a borrower, typically a corporation or government agency.

PortfolioA collection of financial investments, such as stocks, bonds, cash equivalents, and alternative assets, held by an investor.

ROIA performance measure used to evaluate the efficiency or profitability of an investment relative to its cost.

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