Compound interest is one of the most powerful forces in finance. Einstein reportedly called it the eighth wonder of the world — and for good reason.
What is Compound Interest?
Unlike simple interest, which is calculated only on the principal, compound interest is calculated on both the principal and the accumulated interest from previous periods. This creates exponential growth over time.
The Formula
- A = Final amount
- P = Principal (initial investment)
- r = Annual interest rate (decimal)
- n = Compounding frequency per year
- t = Time in years
A Practical Example
Suppose you invest ,000 at 7% annual interest, compounded monthly, for 10 years:
Your money more than doubled — the extra ,097 is pure compound interest.
Compounding Frequency Matters
The more frequently interest compounds, the more you earn. Monthly compounding beats annual compounding, and daily beats monthly. The difference grows significantly over long periods.
Try it yourself
Use our Compound Interest Calculator to see how different rates and frequencies affect your returns.