What is Compound Interest?

Compound interest is the hidden superpower of saving because it helps your money make more money.

Unlike simple interest, which is typically calculated once a year, compound interest is calculated periodically—either daily, monthly, or quarterly—and then added back to your account balance. The next time your interest is calculated, it’s based on the new, increased balance. That means the more times your interest is compounded, the more money you will make.

Let’s say you start with $10,000 in an account that pays 5% simple interest. After 30 years, you’ll earn a total of $15,000. But if you put that $10,000 into an account that’s compounded annually, you’d make more than twice that at $33,219.42!

As you can see, when it comes to saving and investing, compound interest works for you. But when it comes to borrowing money, there’s another side to this coin. For debts with compound interest, you’ll be paying interest on that interest (instead of earning it), so the longer the loan lasts the more interest you’ll pay.