What Is Compound Interest?
Interest calculated on both the original principal and the accumulated interest from prior periods.
Definition
Compound interest means earning interest on your interest. Money in a compound-interest account grows faster than simple interest because each period's interest gets added to the principal, increasing the base for the next period's calculation. The more frequently interest compounds (daily, monthly, yearly), the faster the balance grows. Albert Einstein reportedly called it the eighth wonder of the world. Compounding works for you in savings accounts and against you in credit card debt.
Formula
Future value = P × (1 + r/n)^(n×t)
Example
$10,000 at 7% compounded annually grows to $19,672 in 10 years and $76,123 in 30 years.
Use It
Try the Compound Interest CalculatorRelated Terms
APY (Annual Percentage Yield)The effective yearly return on a deposit or investment, accounting for compounding.PrincipalThe original loan amount or the remaining balance you owe, separate from interest.Interest RateThe percentage a lender charges to borrow money, or that a bank pays on a deposit, per year.