Compound Interest
Understanding how money grows exponentially over time
What is compound interest?
Compound interest is interest calculated on both the original amount and the interest earned in previous periods. Unlike simple interest, compound interest allows gains to generate additional gains over time.
How does compound interest work?
Each period, interest is added to the balance. Future interest is then calculated on this higher amount. Over long periods, this creates exponential growth instead of linear growth.
Example of compound interest
Annual interest rate: 5%
Time period: 10 years
Final value ≈ $16,289
Why is compound interest important?
Compound interest is a foundational concept in investing, retirement planning, and long-term savings. The longer money remains invested, the more powerful the compounding effect becomes.
Where is compound interest used?
Compound interest applies to investment portfolios, savings accounts, retirement funds, and many financial planning strategies.