Compound Interest

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Compound interest is interest you earn on the initial deposit and on the interest you continue to accumulate. In other words, it’s earning interest-on-interest which makes money grow faster than through simple interest.

In an account that pays compound interest, the return is added to the original principal at the end of every compounding period. That’s typically daily or monthly. Each time interest is calculated and added to the account, the larger balance results in more interest earned than before.

The growth of money through compound interest depends on the frequency of compounding.

For example, $100 compounded at 10% annually will be $110 by the end of the year. Whereas, if $100 was compounded monthly at 10% it would be worth more $111.

To summarize, compound interest is interest upon interest, where accrued interest is added to the principal sum. And the new balance is treated as the new principal for the calculation of the interest for the next period.

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