Compound interest

Compound interest is interest calculated on both the original principal and any interest already earned in previous periods. Over time, the effect compounds — each new period earns interest on a slightly larger base — producing exponential rather than linear growth.

Formula

Future Value = Principal × (1 + Rate ÷ Periods) ^ (Periods × Years)

The compounding frequency (annual, monthly, daily) affects the final result: more frequent compounding produces slightly higher returns.

Example

A $10,000 deposit at 6% annual return:

• After 10 years compounded annually: ~$17,908
• After 20 years: ~$32,071
• After 30 years: ~$57,435

Doubling the time horizon more than triples the final balance — this is the power of compounding.

Why compound interest matters

• Long time horizons multiply small differences — a 1% higher annual return over 30 years can mean 30%+ more capital
• Starting early is more valuable than investing more later — the early dollars compound for the longest
• Reinvested dividends and distributions extend compounding — receiving income as cash interrupts the effect
• Fees compound too — a 1% management fee drags returns by far more than 1% over decades

The flip side

Compound interest also works against borrowers. Credit card balances and unpaid loan interest grow exponentially when minimum payments only cover interest charges. The same mathematics that builds wealth for investors can trap borrowers carrying high-rate debt.