Create an animated lesson
On requestThis article is free to read. Creating a lesson uses your daily or stored credits; review the language and settings before starting.
What is compound interest?
FinanceLesson on requestFree to read
Quick answer
Compound interest is interest earned not only on your original money but also on the interest it has already earned. Over time this snowball effect makes savings and investments grow faster and faster. Unlike simple interest (paid only on the principal), compound interest is paid on principal plus accumulated interest.
Key things to understand
- Unlike simple interest (paid only on the principal), compound interest is paid on principal plus accumulated interest.
- The more frequently interest compounds (yearly, monthly, daily), the faster the balance grows.
- Time is the biggest lever — starting early matters more than starting with a large amount.
- The 'Rule of 72' estimates years to double your money: divide 72 by the annual interest rate.
People also ask
What's the difference between simple and compound interest?
Simple interest is calculated only on the original amount. Compound interest is calculated on the original amount plus all previously earned interest.
How does compounding frequency affect growth?
More frequent compounding means interest is added to the balance more often, so you earn interest on interest sooner — slightly boosting total returns.
Can compound interest work against me?
Yes. On debt like credit cards, compound interest makes balances grow quickly if you don't pay them off.