What Is Compound Interest? (With Examples)

Compound interest is what makes your savings and investments grow faster over time. Unlike simple interest, which only earns interest on your original deposit, compound interest earns interest on your deposit and on the interest your money has already earned.

Compound Interest Formula

The basic formula is:

A = P(1 + r/n)^nt

• A = ending balance
• P = starting principal
• r = annual interest rate (as a decimal)
• n = number of times interest compounds per year
• t = number of years

Example: Annual Compounding

If you invest $5,000 at 6% annual interest, compounded once per year, for 10 years:

$5,000 × (1 + 0.06)¹⁰ = $8,954.24

More Frequent Compounding Grows Faster

Here’s how $1,000 grows at 5% interest over 10 years with different compounding frequencies:

• Annually: $1,628.89
• Quarterly: $1,647.01
• Monthly: $1,648.72
• Daily: $1,649.71

Compound Interest in Real Life

• Savings accounts: Banks compound your savings daily or monthly.
• 401(k)s and IRAs: Earnings are reinvested, growing your retirement savings over time.
• Debt: Unfortunately, credit cards also charge compound interest on balances you carry.

Try Our Free Compound Interest Calculator

Want to see how your savings could grow? Use our free Compound Interest Calculator to estimate your future balance based on your starting amount, interest rate, and compounding schedule.

Helpful Resource

For an in-depth explanation of compound interest, visit the Investopedia compound interest guide.