Compound interest
Also called: compounding
Compound interest is interest earned on both your original money and the interest it has already earned, so savings grow faster over time.
The longer money compounds, the more of its growth comes from past growth. That's why starting to invest early matters more than investing large amounts later.
The rule of 72 gives a quick estimate: divide 72 by the yearly rate to get the years it takes to double. At 8%, money doubles in about 9 years.
Formula
A = P × (1 + r/n)^(n·t)
Example
$1,000 at 7% a year, compounded yearly, grows to $1,967 after 10 years and $7,612 after 30.
Related terms
- Interest rate: An interest rate is the price of borrowing money, stated as a percentage of the loan per year.
- Dollar-cost averaging: Dollar-cost averaging means investing the same amount at regular intervals, whatever the price, so you buy more shares when prices are low and fewer when they're high.
- Inflation: Inflation is the rate at which prices across the economy rise over time, so each dollar buys less.
Guides
Practise with $10,000 in play money
Free. No real money involved.
For learning only. This isn't financial advice.