Compound interest is the process where your money earns interest, and then that interest also earns interest over time. This creates a snowball effect that can significantly increase your total returns.
When you invest or save money, you may earn interest. With compound interest, that interest gets added to your balance — and future interest is calculated on the new, larger amount.
Over time, this leads to faster and faster growth.
Let’s say you invest $1,000 at a 5% annual return:
Each year, you’re earning interest on a slightly larger amount — not just the original $1,000.
A basic compound interest formula looks like this:
While the formula is useful, most people prefer using a calculator to estimate results quickly.
With simple interest, you only earn interest on your original amount. With compound interest, you earn interest on both your original money and accumulated interest.
Over longer periods, this difference becomes very significant.
You can learn more about CDs in our CD guide.
Compound interest is one of the most important concepts in personal finance. Understanding how it works can help you make better decisions about saving, investing, and long-term planning.
To see how your own money could grow, use the compound interest calculator or explore how monthly contributions add up over time.