Glossary
Compound Interest
Interest earned on both the original amount and previously earned interest, producing accelerating growth over time.
Compound interest is interest that earns interest. When an account credits interest, that interest joins the balance — and the next crediting period computes interest on the enlarged whole. The result is exponential rather than linear growth: a curve that starts flat and steepens forever.
The formula for a lump sum is FV = P(1 + r/m)^(m·t), where P is the principal, r the annual rate, m the compounding frequency, and t the years. The variable doing the heavy lifting is t, in the exponent: $10,000 at 7% becomes about $19,700 in 10 years, $38,700 in 20, and $76,100 in 30. Each decade earns more than the one before, because the base keeps growing.
Three practical consequences. Starting early beats contributing more — years in the exponent outweigh dollars in the base. Small rate differences compound into enormous outcome differences over decades, which is why fund fees (see expense ratio) matter so much. And the same mathematics runs in reverse against borrowers: credit card debt compounds at rates north of 20%, making it the most efficient wealth destroyer most households ever encounter.
Model any scenario with the compound interest calculator.
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