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What it is
With compound interest you earn interest on your interest. Each period the interest is added to the balance, and the next period’s interest is worked out on the larger amount.
The formula
A = P × (1 + r/n)^(n × t). P is the starting amount, r is the annual rate as a decimal, n is how many times a year interest is added, and t is the number of years.
Example
Put 5,000 at 5 percent, compounded monthly, for 20 years: the balance grows to about 13,600 without adding anything. Add 200 every month and it reaches roughly 95,800 even though you paid in only 53,000.
Why time and deposits matter
- Starting early beats saving more later, because growth builds on growth.
- Regular deposits grow quickly because every deposit starts earning straight away.
- Higher fees reduce growth, so watch them.
The Rule of 72
Divide 72 by the annual rate to estimate how many years it takes to double. At 6 percent that is about 12 years. Use the calculator for exact figures.
Savings accounts and investments
A savings account quotes an annual rate, often with interest added monthly. Investments do not grow in a straight line: returns go up and down. The calculator shows a steady rate, so use it to compare plans and not to predict a result.
Compound interest on debt
It works against you on credit cards and some loans, because unpaid interest is added to what you owe. That is why paying more than the minimum matters. Enter the card’s rate into the calculator to see how fast a balance can grow.