How does compound interest work?

Compound interest works by adding the interest earned in each period to the principal. Future interest calculations are then based on this increased principal, allowing for faster growth over time.

What is the formula for compound interest?

The formula for compound interest is A = P (1 + r/n)^(nt), where A is the final amount, P is the initial principal, r is the annual interest rate, n is the number of times interest is compounded per year, and t is the time in years.

How often is interest compounded?

Interest can be compounded annually, semi-annually, quarterly, monthly, or daily. The more frequently interest is compounded, the greater the impact on growth.

What are the benefits of compound interest?

Compound interest allows investments to grow exponentially over time. The longer you leave your money invested, the more it compounds, making it a powerful tool for long-term savings.

What is the difference between simple and compound interest?

Simple interest is calculated only on the original principal, while compound interest is calculated on both the principal and the accumulated interest. Compound interest results in faster growth.

Compound Interest: Quick Read

Compound interest

QUICK READ

Compound interest helps your money grow by earning interest on both your original deposit and the interest you've already earned.

It is one of the most powerful forces in saving and investing, helping even small amounts build significantly over time.

Good for

•

Building long-term wealth:

Compound interest accelerates growth by reinvesting earnings over time.

•

Maximising early saving:

The sooner you start, the more time your money has to compound.

•

Earning interest on interest:

Returns grow exponentially as interest accumulates on past gains.

Things to consider

•

Compounding takes time:

The biggest gains happen later, so patience is key.

•

Debt compounds too:

High-interest debt can grow quickly, working against savings.

•

Returns aren't guaranteed:

Investment growth varies, and market downturns can slow compounding.

1. What is compound interest?

Compound interest is interest earned not only on your original amount (principal) but also on all previously earned interest. It causes money to grow faster compared to simple interest, where interest is only earned on the original principal.

2. Compound interest formula

Compound interest is calculated using a formula that accounts for the initial principal, the interest rate, and the frequency with which the interest is compounded. This formula helps you determine how much an investment or loan will grow over time with compound interest.

Formula: The formula for calculating compound interest is:

A = P ( 1 + r n ) ^nt

Where:

A = Final amount (principal + interest)

P = Initial, or principal amount

r = Annual interest rate

n = Number of times interest is compounded per year

t = Time, in years

3. Benefits of compounded interest

Compounded interest strengthens your investment growth and reduces the effort needed to reach your financial goals, making it a powerful tool for building wealth.

Accelerated growth - Compounded returns build on themselves, causing your investment to grow faster as it expands.
Easier goal achievement - Compounding reduces the amount you need to save or invest by making your money work harder for you.

4. Calculator

Whether you're taking out a loan or investing in a savings account, understanding how simple and compound interest work in everyday scenarios—such as credit card debt or mortgage repayments—can help you make more informed financial decisions and minimize the overall cost of borrowing.

When understanding the rate of interest you'll pay on your debt, it's important to grasp the concepts of simple and compound interest.

Calculator

Simple interest calculator

Use our calculator to explore how compounding frequency impacts the and the total interest paid on your savings.

Balance:

Rate:

Compound frequency:

Years:

FUTURE BALANCE:

INTEREST:

ANNUAL EQUIVALENT RATE (AER):

Interpreting the result

5. Impact of compound interest on your savings

Let's explore how your initial investment grows over time, breaking down the total interest into the amount earned directly on your principal and the amount earned from reinvested interest.

Interactive chart

Draw chart

Starting balance:

Annual interest rate (%):

Years:

Compounding frequency: