Compound Interest
Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. It causes savings and investments to grow exponentially over time.
$10,000 at 7%/year compounded annually for 20 years → $38,697.
With simple interest, you earn interest only on the principal. With compound interest, you earn interest on the principal plus any interest already earned. The more frequently interest compounds (daily vs. annually), the more you earn.
Compound interest is the engine behind long-term wealth building. A one-time investment of $10,000 earning 7% compounded annually grows to $76,123 in 30 years — without adding another dollar.
The same effect works in reverse with debt: compound interest causes balances to grow quickly when minimum payments don't cover accruing interest.
Put this into practice with our free calculator:
Open calculator →Related terms
- Rule of 72
- The Rule of 72 is a quick mental maths shortcut: divide 72 by an annual interest rate to estimate the number of years it takes for an investment to double.
- Rate of Return
- A rate of return (RoR) is the net gain or loss of an investment over a specified period, expressed as a percentage of the initial investment.
- Annual Percentage Yield (APY)
- APY is the real rate of return on a savings account or investment after compounding is factored in for one year. A higher compounding frequency means APY > APR at the same nominal rate.