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Glossary
Investing Basics
beginner

Compound Interest

Interest calculated on both the initial principal and the accumulated interest from prior periods.

Also known as
compounding

Compound interest is the addition of interest to the principal sum of a loan or deposit — interest on interest. It makes a balance grow faster than simple interest, which is calculated only on the principal.

The effect compounds more powerfully the more frequently interest is added and the longer the money stays invested, which is why starting early has an outsized impact on long-term growth.

Formula

A = P\left(1 + \frac{r}{n}\right)^{nt}

Examples

$1,000 at 7% for 30 years

Investing $1,000 at a 7% annual rate compounded monthly grows to roughly $8,100 after 30 years — versus about $3,100 with simple interest.

Related Terms

References