What Is Compound Interest?
Last updated
Compound interest means you earn interest on your interest. Each period’s interest is added to the balance, so the next period is calculated on a larger amount.
The formula and an example
Final amount = P × (1 + r ÷ n)^(n × t), where P is the starting amount, r the yearly rate as a decimal, n the number of times interest is added per year and t the number of years.
Example: 1,000 at 5% a year for 10 years is about 1,628.89 when interest is added once a year, and about 1,647.01 when it is added monthly. The difference between the two is small here but grows with higher rates and longer periods.
The rule of 72
Divide 72 by the annual rate to estimate how long it takes to double an amount. At 6%, that is about 12 years. It is a rough shortcut, not an exact result.
Why it works against you too
The same effect applies to debt. Interest that is not paid builds on itself, which is why the Mortgage Calculator shows total interest as well as the monthly payment.
Try your own numbers
The Savings Calculator adds regular monthly deposits to the picture. It assumes a fixed rate and ignores tax and inflation, so treat results as a projection, not a promise. This is general information, not financial advice.
Common questions
Is compound interest always good?
It helps savings grow and makes debt grow. Which it does depends on whether you earn or owe the interest.