Compound interest is the process where the interest you earn starts earning interest itself. Over time, this creates exponential growth — the kind that turns modest savings into substantial wealth.
Simple vs. Compound Interest
Simple interest grows linearly: you earn the same amount each year. Compound interest grows exponentially: each year you earn interest on a larger balance, so your gains accelerate.
The Formula
A = P × (1 + r/n)^(n×t)
Where A is the final amount, P is the principal, r is the annual rate, n is the compounding frequency per year, and t is the number of years.
Why Frequency Matters
The more frequently interest compounds, the faster your money grows. Daily compounding beats monthly, which beats annual — though the difference shrinks at lower rates.
The Power of Time
Time is the most important variable in compounding. Someone who invests $200/month from age 25 to 35 and then stops will often end up with more than someone who invests $200/month from age 35 to 65. Start early.
Use our compound interest calculator to project your own growth and see the impact of different rates and time horizons.