Key Takeaways
- Compound interest earns interest on interest.
- Time is the biggest driver — growth accelerates later.
- More frequent compounding gives a higher final value.
- Simple interest, by contrast, only ever earns on the principal.
On this page
The core idea
With simple interest, you always earn on the original principal alone. With compound interest, each period's interest is added to the balance, so future interest is calculated on a larger and larger amount. This "interest on interest" is what makes long-term growth accelerate.
The formula
A = P × (1 + r/n)n×t
where P is principal, r is the annual rate, n is compounding periods per year, and t is years. Adding regular contributions makes the balance grow faster still.
What matters most
- Time: the longer money compounds, the more dramatic the effect.
- Rate: higher rates compound to much larger sums over long periods.
- Frequency: more frequent compounding adds a little extra.
Experiment with all three in the compound interest calculator and watch how small changes in time or rate produce large changes in the final value.
Sources
We reference primary and official sources. Rate- and rule-dependent details must be verified against the latest official information.
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