What Is Compound Interest? Meaning & Example
Definition
Compound interest is interest earned on both your original money and the interest already added to it. Over long periods it can make savings grow much faster than simple interest.
Related terms
The Rule of 72 is a shortcut to estimate how long money takes to double: divide 72 by the annual return percentage. It is an approximation, most accurate for moderate rates.
APY (Annual Percentage Yield)APY is the yearly return on savings including the effect of compounding. It is useful for comparing savings accounts and CDs.
Time HorizonYour time horizon is how long you expect to hold an investment before you need the money. Longer horizons generally allow for more risk because there is time to recover from downturns.
What is Compound Interest?
Compound interest is interest earned on both your original money and the interest already added to it. Over long periods it can make savings grow much faster than simple interest.
Can you give an example of Compound Interest?
$1,000 earning 7% a year compounds to about $1,967 after 10 years, without adding any new money.