Compound Interest
Simple Interest
💰 Compounding Interest
Learn how your money can grow exponentially over time through the power of compounding
What is Compounding?
Simple Definition
Compounding is when you earn interest on both your original money (principal) and the interest you've already earned. This creates exponential growth over time.
Why It's Powerful
Compounding is often called the "eighth wonder of the world" because it allows your money to grow exponentially. The longer you let it compound, the faster it grows.
Key Formula
A = P(1 + r/n)^(nt)
A = Final Amount
P = Principal (starting amount)
r = Annual interest rate (as decimal)
n = Number of times interest compounds per year
t = Time in years
How Compounding Works
Understanding the Growth
- Year 1: You earn interest on your principal
- Year 2: You earn interest on principal + Year 1 interest
- Year 3: You earn interest on principal + Year 1 + Year 2 interest
- And so on... Each year, your interest earns more interest!
Interactive Compounding Calculator
Final Amount
$1628.89
Total Interest Earned
$628.89
Growth Multiple
1.63x
Growth Over Time
Example Scenarios
Basic Example
Start with $1,000 at 5% annual interest, compounded annually for 10 years
Starting Amount:$1,000
Interest Rate:5%
Time Period:10 years
Compounding:annually
Final Amount:$1,628.89
Total Interest:$628.89
Compound Interest vs Simple Interest
Simple Interest
$1500.00
Interest Earned: $500.00
Interest is only calculated on the original principal amount. It grows linearly.
→
Compound Interest
$1628.89
Interest Earned: $628.89
Interest is calculated on principal + all previously earned interest. It grows exponentially.
Difference
Compound interest earns you $128.89 more than simple interest over 10 years!
Key Takeaways
1. Time is Your Best Friend
The longer you let your money compound, the more dramatic the growth. Starting early makes a huge difference.
2. Frequency Matters
More frequent compounding (daily vs. annually) results in slightly higher returns, even at the same interest rate.
3. Rate Makes a Big Difference
A small increase in interest rate can result in significantly more money over long periods due to exponential growth.
4. Start Early, Stay Consistent
The power of compounding works best when you start early and let it work over many years. Consistency beats timing.