Compound interest is the interest on savings calculated on both the initial principal and the accumulated interest from previous periods.
Key Takeaways
- Compound interest makes a sum of money grow at a faster rate than simple interest.
- It is often referred to as “interest on interest.”
- The rate at which compound interest accrues depends on the frequency of compounding, such that the higher the number of compounding periods, the greater the compound interest.
How It Works
When you invest money, you earn interest on your initial investment (the principal). In the next period, you earn interest on both the principal and the interest you earned in the first period. This snowball effect can lead to significant growth over time.