Compound interest

How it works

Interest is added at set intervals called compounding periods, which may be yearly, monthly, or daily depending on the account or loan. Each calculation starts from the balance left by the one before, so the dollar amount of interest grows even when the rate stays the same. At the same stated rate, compounding more often gives a slightly larger result: $1,000 at a hypothetical 6% for one year becomes $1,060 compounded yearly, or about $1,061.68 compounded monthly.

Time does much of the work. With yearly compounding and no deposits or withdrawals, the ending balance equals the principal multiplied by (1 + the annual rate) once for every year, with the rate written as a decimal, so 6% is 0.06. A rough shortcut called the Rule of 72 estimates how long a balance takes to double: divide 72 by the annual rate written as a percent, not a decimal. At a hypothetical 6%, 72 ÷ 6 is about 12 years.

The same arithmetic can work against you. On a debt where unpaid interest is added to the balance, later interest is charged on that interest too. For investments, a projection that applies one steady percentage every year is a simplification: market returns vary, can be negative, and fees, taxes, and inflation all reduce what the final number is worth.

Related terms

Sources and further reading

• Investor.gov: What is compound interest?
• Investor.gov: Compound interest calculator

Examples are illustrative and focus on U.S. personal finance. This page is educational, not individual financial, investment, tax, or legal advice. Read our editorial approach or report a correction.