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What Is Compound Interest?

Compound interest (or compounding interest) is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods.

Compound interest is calculated by multiplying the initial principal amount by one plus the annual interest rate raised to the number of compound periods minus one.

Because compound interest includes interest accumulated in previous periods, it grows at an ever-accelerating rate.

Once interest is added to an account, it starts earning interest itself, increasing the rate at which the account can grow. This applies to all sorts of savings instruments, including savings accounts, money market funds, and certificates of deposit (CDs).

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