What is compound interest?
Interest calculated not only on your original amount but also on the interest already added. Because each period earns interest on a slightly larger balance, the total grows faster over time.
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Compound interest
Future value of a principal under compound interest.
A = P(1 + r/n)^(nt)
Frequently asked questions
What does the formula A = P(1 + r/n)^(nt) mean?
P is the starting principal, r the yearly rate (as a decimal), n how many times a year interest is added, and t the number of years. A is the final amount once all the compounding is done.
How is compound interest different from simple interest?
Simple interest is calculated only on the original principal, so it grows in a straight line. Compound interest grows on the running balance, so the curve bends upward and pulls ahead over time.
Where is this used in real life?
Savings — $1,000 at 5% compounded monthly grows to about $1,647 in ten years. Loans and credit cards — the balance you owe compounds the same way, which is why debt grows quickly. Inflation — prices compound, so money loses value over time at a compounding rate.
What does the growth chart show?
The curve plots your balance year by year, with a dashed line at the original principal, so you can see how much of the final amount is interest versus your starting deposit.