Home › Glossary › Compound Interest
Compound interest is interest calculated on both the original principal and accumulated interest. It works against you on debt and for you on savings/investments.
Compound interest is the dominant force in long-term finance — both for and against the saver/borrower. On savings and investments, compound interest grows wealth exponentially over decades. On debt (especially credit cards), compound interest is what makes carrying balances so expensive. The key variable is compounding frequency: daily compounding (most credit cards) accumulates faster than monthly, which beats annual.
Savings example: $10,000 invested at 7% annual return, compounded annually, becomes ~$76,000 after 30 years. The first $10,000 is your original deposit; the remaining $66,000 is compound interest. Debt example: $5,000 credit card balance at 22% APR with daily compounding accumulates ~$92 in interest the first month; if unpaid, that $92 becomes part of next month's interest base.
Compared to simple interest: Simple interest on $10,000 at 7% for 30 years = $21,000 in interest. Compound interest on the same = $66,000 in interest. The same starting amount, same rate, same time period — compound interest is 3× more powerful. The Rule of 72: Divide 72 by your annual interest rate to estimate years to double. At 7%, money doubles every ~10 years. At 22% (credit card APR), unpaid debt doubles every ~3.3 years.