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Finance Dictionary

Compound Interest

Definition

Interest calculated on the initial principal, which also includes all of the accumulated interest.

Deep Dive

Compound interest is the interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods. It is often described as "interest on interest" and is a powerful force in finance, leading to exponential growth of an investment or debt over time. The longer the money is invested and the more frequently the interest is compounded (e.g., annually, quarterly, monthly), the more significant the impact of compounding.

Examples & Use Cases

  • 1A savings account earning 3% annual interest, with earned interest reinvested
  • 2A retirement fund growing over 30 years due to reinvested dividends and interest

Related Terms

Simple InterestExponential GrowthTime Value of Money

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