Compound Interest Explained

Understand how compound interest grows savings and debt, with formulas, examples, and when compounding frequency matters.

Compound interest means you earn (or pay) interest on both the principal and previously accrued interest. Over time, compounding can dramatically outpace simple interest.

The basic formula

A = P × (1 + r/n)^(n×t), where A is the future amount, P is principal, r is the annual rate as a decimal, n is compounds per year, and t is years.

Example

$1,000 at 5% compounded annually for 10 years grows to about $1,629. At monthly compounding, the same deposit grows a bit more because interest is added more often.

Why frequency matters

Daily or monthly compounding accelerates growth compared with annual compounding at the same nominal rate. Always compare APY (annual percentage yield) when shopping for savings products.

Try it

Experiment with principal, rate, and frequency in the interest calculator.