Compound Interest
Interest calculated on both principal and accumulated interest, creating exponential growth over time.
What You Need to Know
Compound interest is "interest on interest"—the process where your money grows exponentially because you earn returns on both your original investment and all previously earned returns.
The Magic Formula: A = P(1 + r)^t
- A = Final amount
- P = Principal (initial investment)
- r = Annual interest rate
- t = Time in years
Example: $10,000 invested at 7% for 30 years:
- Year 1: $10,700 (simple interest would be $10,700)
- Year 10: $19,672
- Year 20: $38,697
- Year 30: $76,123
The Power of Time: Starting early is crucial. A 25-year-old investing $200/month until 65 has more money than a 35-year-old investing $400/month until 65, despite contributing less total money.
Compound Interest vs. Simple Interest:
- Simple: You earn interest only on the principal
- Compound: You earn interest on principal + all previous interest
Sources & References
This information is sourced from authoritative government and academic institutions:
- investor.gov
https://www.investor.gov/introduction-investing/investing-basics/glossary/compound-interest
Related Calculators & Tools
Put your knowledge into action with these interactive tools: