Compound Interest Definition

Compound interest is the interest that accrues on an investment or loan over time. It is the interest that is earned not only on the initial principal, but also on the accumulated interest of previous periods. Compound interest can be thought of as ‘interest on interest,’ and it can be found in a variety of financial contexts.

In general, compound interest is calculated by multiplying the principal amount by one plus the annual interest rate to the power of n, where n equals the number of years since you first invested or borrowed money. This formula can be used to calculate compound interest for any time period, whether it’s monthly, quarterly, or yearly.

The key to successful investing is understanding how compound interest works and using it to your advantage. With compound interest, even small investments can grow into large sums of money over time. And while compounding does work in favor of the borrower or investor, it can also work against them if they have unpaid debts with high-interest rates.