Compound Interest
Quick Answer
Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods, creating exponential growth over time.
Definition
Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods, creating exponential growth over time.
Explanation
Compound interest is often called the eighth wonder of the world because of its powerful ability to grow wealth. Unlike simple interest, it earns interest on previously earned interest. The frequency of compounding matters — daily generates more than monthly, which generates more than annual compounding.
Time is the most critical factor. Starting just a few years earlier can result in dramatically more wealth due to the exponential nature of compounding. Compound interest works for you when saving and investing, but against you on credit cards and loans.
Example
Investing $10,000 at 7% compounded monthly grows to $19,671 after 10 years, $38,697 after 20 years, and $76,123 after 30 years.
Frequently Asked Questions
What is Compound Interest?
Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods, creating exponential growth over time.
How does Compound Interest work?
Compound interest is often called the eighth wonder of the world because of its powerful ability to grow wealth. Unlike simple interest, it earns interest on previously earned interest. The frequency of compounding matters — daily generates more than monthly, which generates more than annual compounding.Time is the most critical factor. Starting just a few years earlier can result in dramatically more wealth due to the exponential nature of compounding. Compound interest works for you when saving and investing, but against you on credit cards and loans.
Can you give an example of Compound Interest?
Investing $10,000 at 7% compounded monthly grows to $19,671 after 10 years, $38,697 after 20 years, and $76,123 after 30 years.
Free Excel Templates
Also try our free Retirement Savings Projection template
Project your retirement savings growth over time. Calculate if you're on track to meet your retirement goals with compound interest.
Download Retirement Savings ProjectionAlso try our free Investment Portfolio Tracker template
Monitor your investment portfolio performance. Track stocks, bonds, ETFs, and mutual funds with automatic gain/loss calculations.
Download Investment Portfolio Tracker