Compound Interest

Interest calculated on both the original amount and the interest already earned.

Compound interest is what happens when interest earns its own interest. Instead of a fixed amount added each period (simple interest), the interest is calculated on a growing balance — the original principal plus everything it has already earned. The more often it compounds (daily vs. monthly vs. annually) and the longer the time horizon, the bigger the gap between compound and simple growth becomes.

Worked Example

$10,000 at 7% simple interest earns $700 every year for 20 years — $14,000 total. The same $10,000 at 7% compounded annually grows to roughly $38,700 over 20 years, because each year's interest is calculated on a larger balance than the year before.

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