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GlossaryReference

Compound Interest

Interest earned on both your original money and the interest it has already generated.

What Compound Interest means

Compound interest is interest that builds on itself. When you earn interest, it is added to your balance, and the next period's interest is calculated on that larger total. Over time this creates exponential growth. It works against you on debt (balances grow faster) and for you on savings and investments (balances grow faster). Time is the most powerful ingredient — the earlier you start, the more compounding can do.

Example

Invest $200 a month at an average 7% annual return for 40 years and you'll contribute $96,000 — but the account could grow to roughly $480,000 because of compounding.

Related terms

InterestAPYIndex FundDollar-Cost Averaging

Disclaimer

Definitions are simplified for educational use and are not personalized financial, investment, tax or legal advice.

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Frequently asked questions

Invest $200 a month at an average 7% annual return for 40 years and you'll contribute $96,000 — but the account could grow to roughly $480,000 because of compounding.

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