Saving & investing
What Is Compound Interest? Definition and Example
Compound interest is interest calculated on both the original principal and interest already added to the balance.
Also called: Compounding.
How it works
When earnings stay invested, they become part of the amount earning the next period’s return. At a fixed positive rate, the interest earned each period grows even when you add no new money. The compounding frequency tells you how often interest is added; monthly and annual nominal rates need equivalent-rate conversion before comparison.
Future value = principal × (1 + annual nominal rate / periods per year)^(periods per year × years)
Use rates as decimals: 4% is 0.04. This formula assumes a constant rate, no extra deposits or withdrawals, and no taxes or fees.
$1,500 growing at 4% for three years
Start with $1,500 and compound once each year at a hypothetical 4% annual rate.
- Year 1: $1,500 × 1.04 = $1,560; interest is $60.
- Year 2: $1,560 × 1.04 = $1,622.40; interest is $62.40.
- Year 3: $1,622.40 × 1.04 = $1,687.296, displayed as $1,687.30.
Total interest is $187.30, versus $180 with simple interest on the original $1,500.
Annual compounding; no contributions, withdrawals, taxes or fees. Carry full precision until the displayed result.
Try these example inputsCompounding is a mechanism, not a promised return
A savings rate may change and investment returns can be negative. A smooth fixed-rate projection does not represent market volatility. Simple interest, by comparison, is calculated on the original principal without earning interest on prior interest.
Explore with a calculator
- Compound Interest Calculator
Project a balance in Compound Growth, or compare equivalent compounding rates.
- Interest Calculator
Explore how regular contributions change the projected balance.
Sources and checks
Definition and example arithmetic checked . Sources explain the concepts; numerical examples use the assumptions stated above.
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