Compound Interest
Compound interest is interest that is earned not only on the original principal but also on all interest that has previously been added to the account. This mechanism creates an exponential growth curve rather than a straight line.
The Formula
A = P × (1 + r/n)^(n×t)
| Variable | Meaning | |----------|---------| | A | Final balance | | P | Starting principal | | r | Annual interest rate (decimal) | | n | Compounding periods per year | | t | Time in years |
Why It Matters
At a 7% annual rate, $10,000 grows to $76,123 in 30 years with monthly compounding — versus only $31,000 with simple interest. The difference — more than $45,000 — is pure compounding effect.
Related Tools
- Compound Interest Calculator — Model any principal, rate, and term.
- Loan Amortization — See compound interest working against you in a loan.
- CAGR Calculator — Measure compound annual growth on investments.
→ Read the full guide: Compound Interest Explained