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Glossary Finance

Compound interest

Compound interest is interest calculated on the original amount plus all the interest already added, so growth builds on itself.

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In more detail

The formula is A = P(1 + r/n)^(nt). Over long periods the effect is large, which rewards starting to save early and punishes carrying high-interest debt. The APY captures it as a single yearly figure. See How Compound Interest Works.

Example

$10,000 at 5% for 10 years grows to $16,288.95 with yearly compounding, against $15,000 with simple interest.

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See also

  • Glossary APY
    APY (annual percentage yield) is the real yearly return on savings once compounding is included.
  • Glossary Inflation
    Inflation is the general rise in prices over time, which reduces what each unit of money can buy.
  • Guide How Compound Interest Works
    The compound interest formula with a worked $10,000 example, how compounding frequency matters, APR versus APY.
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