What is compound interest?
Compound interest means previously accrued interest enters the base for later interest. It affects savings growth and borrowing costs.
How it works
1. Example At 10% per period, 100 grows to 110 and then 121 after two periods, if all interest is reinvested. 2. Formula With a constant periodic rate r over n periods, future value is principal × (1+r)^n. Match the rate and period units. 3. Frequency Monthly versus annual compounding can produce different effective annual returns from the same nominal quote. Fees matter too. 4. Time and contributions More periods magnify compounding, but variable returns, withdrawals, losses and new contributions change the outcome.
Practical cautions
5. Debt Compounding can raise borrowing costs. Review the contractual rate, repayment schedule, taxes and fees. 6. Real value A larger nominal balance may not mean greater purchasing power. Inflation and tax change the real outcome. 7. Misleading comparisons Compare effective rates on the same basis and include costs. A fixed illustration is not a forecast for variable returns.