Finance
What Is Compound Interest?
5 min read
Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. It is often called "interest on interest," and it is one of the most powerful concepts in finance.
Simple vs Compound Interest
Simple Interest: Calculated only on the original principal. Formula: I = P × R × T
Compound Interest: Calculated on principal plus accumulated interest. Formula: A = P × (1 + R/n)n×t
Example: $10,000 at 7% for 10 Years
- Simple Interest: $10,000 + ($10,000 × 7% × 10) = $17,000
- Compound Interest (annually): $10,000 × (1.07)10 = $19,672
The Power of Compounding Frequency
The more frequently interest compounds, the more you earn. Common compounding periods:
- Annually (once per year)
- Quarterly (4 times per year)
- Monthly (12 times per year)
- Daily (365 times per year)
Try our Interest Calculator to compare simple and compound interest for your scenarios.