Finance Definition
Compound Interest
📈 Investing
basic

Quick Definition

Interest calculated on both the principal amount and previously earned interest.

Formula

A = P(1 + r/n)^(nt) where A = final amount, P = principal, r = annual interest rate, n = number of times compounded per year, t = time in years

Examples

  • 1$1,000 invested at 5% annually compounded becomes $1,050 after year 1, then $1,102.50 after year 2
  • 2A savings account with daily compounding earns more than one with annual compounding at the same rate
  • 3Starting to invest at age 25 vs 35 can result in hundreds of thousands more due to compound interest

Tags

investinginterestsavingsgrowth
Related Terms
Other terms you might find helpful
APR (Annual Percentage Rate)
The yearly cost of a loan including interest and fees, expressed as a percentage.
Quick Info
Category:Investing
Difficulty:basic
Last Updated:12/15/2024