Sources: IRS, SEC, Federal Reserve, U.S. Bureau of Labor Statistics & U.S. Census Bureau. See our editorial standards.
Interest calculated on both the original principal and the accumulated interest from prior periods, causing your balance to grow at an accelerating rate.
Definition: Interest calculated on both the original principal and the accumulated interest from prior periods, causing your balance to grow at an accelerating rate.
Compound interest is the interest you earn on your interest. Unlike simple interest, which is calculated only on your initial deposit (the principal), compound interest is calculated on the principal plus all previously earned interest. Over long periods this produces exponential, rather than linear, growth — which is why it is often called the most powerful force in investing.
A = P(1 + r/n)^(nt) — where P is principal, r is the annual rate, n is the number of compounding periods per year, and t is years.
Invest $10,000 at 8% compounded annually. After 1 year you have $10,800. In year 2 you earn 8% on $10,800 (not just the original $10,000), giving $11,664. After 30 years that single $10,000 grows to about $100,627 — more than 10x — without adding another cent.
Put this concept to work with our free Compound Interest Calculator.
Open the Compound Interest Calculator →
← Back to the full investing glossary
The content on this page is for informational purposes only and should not be considered financial advice. Rates, terms, and offers are subject to change. We may earn a commission through affiliate links at no extra cost to you. See our full disclaimer.
© 2024–2026 AIHowToInvest.com | About | Contact | Privacy | Terms | Disclaimer