Glossary
What Is Compound Interest? Definition and Example
Compound interest is interest earned on both your original money and on the interest it has already earned, so growth builds on itself over time.
What it means
The longer money compounds, the bigger the effect. The formula is future value equals the principal times (1 plus the rate) raised to the number of years. Real returns vary and can be negative, so examples are illustrations, not forecasts.
Example
1,000 growing at 7% a year for 10 years becomes about 1,967 in this simple illustration.
Why it matters
Compounding is why starting early and staying consistent matter.
Related terms
- Dollar-Cost Averaging (DCA): Dollar-cost averaging is investing a fixed amount at regular intervals, such as every month, regardless of.
- Financial Freedom: Financial freedom means having enough savings and income from assets to cover your living costs without.
- Asset Allocation: Asset allocation is how you divide your investments between asset types such as shares, bonds, cash and.
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Frequently asked questions
Is compound interest guaranteed?
Only on products that promise a fixed rate. Investment returns vary and can be negative.
Why does starting early help?
More time lets growth build on earlier growth.
What is the difference from simple interest?
Simple interest is paid only on the original amount.