How Compound Interest Works
Learn how compound interest grows your money faster than simple interest.
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What is Compound Interest?
Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods.
Formula
A = P(1 + r/n)^(nt)
Where:
A = Final amount
P = Principal
r = Annual interest rate (decimal)
n = Compounding frequency per year
t = Time in years
Example
Principal: 10,000
Rate: 10%
Time: 2 years
Yearly compounding
A = 10000(1 + 0.10)^2 = 12,100
Compound Interest = 12,100 - 10,000 = 2,100