Compound Interest
Interest earned on both your original money and the interest already added to it, which makes balances grow faster over time.
What Compound Interest means
Compound interest is interest calculated on your principal plus all previously accumulated interest. Simple interest pays only on the original amount; compound interest pays on a base that keeps growing.
The effect is modest at first and dramatic later, because growth is exponential rather than linear. Most of the final balance in a decades-long investment comes from returns on prior returns, not from contributions.
Time matters more than amount. A saver who invests $200 a month from age 25 to 35 and then stops often ends up ahead of one who starts at 35 and contributes for thirty years — the first saver's money simply had longer to compound.
Compounding works against you just as reliably on debt. Credit card balances compound daily, which is why carried balances grow so quickly.
Example
In practice: $10,000 growing at 7% a year becomes about $19,700 in 10 years, $38,700 in 20, and $76,100 in 30 — with no further contributions.
Related terms
APY (Annual Percentage Yield)
The yearly return on savings including the effect of compounding, which makes it the honest number for comparing deposit accounts.
Interest Rate
The percentage charged for borrowing money or paid for depositing it, quoted as an annual figure.
Capitalization
When unpaid interest is added to your loan balance, so you begin paying interest on that interest.
Index Fund
A fund that mechanically tracks a market index rather than picking stocks, giving broad exposure at very low cost.
Emergency Fund
Cash set aside in an accessible account to cover unexpected expenses or a loss of income without taking on debt.
Run the numbers
Compound Interest Calculator
See how your savings grow over time with compound interest and regular monthly contributions.
Savings Goal Calculator
Plan how long it will take to reach a savings goal and how much to save each month to get there on time.
Retirement Calculator (401k & Roth IRA)
Project your retirement balance with employer match and compound growth, and compare Traditional vs. Roth after-tax outcomes.
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