What Is Compound Interest?
Compound interest is interest you earn on your interest. Each period, the interest you have already earned is added to your balance, and the next period's interest is calculated on that larger balance. Over long stretches of time the growth stops being linear and starts compounding — which is precisely how the word compound matters.
The short definition
On a deposit, compound interest is interest calculated on both the original principal and on the accumulated interest from earlier periods. On a loan, it is the same idea — interest builds on unpaid interest, which is why credit card balances spiral when only the minimum is paid. It is often summarized as "interest on interest".
Why it matters for real money
The single most important variable in compounding is time. A small monthly investment left alone for decades can grow into many times itself, mostly from growth rather than from your contributions. That effect matters whether you are building a retirement corpus, a travel fund, or a certificate of deposit.
The frequency also matters, though less than time and rate. Because growth compounds month by month, monthly or daily compounding beats yearly compounding at the same nominal rate — the difference is usually a fraction of a percent per year, but it adds up over decades.
The formula, in plain words
The standard compound interest formula is A = P (1 + r/n)^(n × t), where A is the final amount, P the principal, r the annual rate as a decimal, n the number of compounding periods per year, and t the time in years. The interest earned is simply the final amount minus what you invested. For the full step-by-step walkthrough, read how to calculate compound interest.
Compound interest vs simple interest
Simple interest pays only on your original principal, so it grows in a straight line. Compound interest pays on principal plus accrued interest, so it grows on a curve. The two look similar for a year and wildly different over a decade. See the numbers side by side in our simple vs compound interest comparison.
Use the calculators
- Timeline Simulator — the full multi-phase compound interest calculator: chain SIPs, lump sums, holds and retirement drawdowns, with inflation-adjusted balances and XIRR.
- SIP Calculator — future value of regular monthly investments.
- Lump Sum Calculator — how a single investment compounds.
Frequently asked questions
Why is compound interest called the eighth wonder of the world?
The saying is often attributed to Albert Einstein. It captures how interest on interest snowballs: small, consistent moves made early can become enormous — and the longer the time horizon, the faster the curve climbs.
What is the fastest way to grow savings with compound interest?
Start as early as possible, reinvest every rupee or dollar of earnings, and leave the plan alone. Consensus is powerful: at 10% your money roughly doubles every 7 years, so thirty years of compounding is four doublings — not one.
Do savings accounts use compound interest?
Most savings accounts compound monthly or daily and credit the interest on that cycle. The published APY already includes this compounding effect, so it is the fair basis for comparing accounts.