Glossary
Compound interest
Compound interest is interest earned on both the original amount and the interest already added to it, so savings (and debts) grow faster over time than with simple interest.
A sum P at a yearly rate r compounded n times a year grows to P × (1 + r/n)^(n × t) after t years. The more often interest compounds, the slightly faster it grows; the rate and the time matter far more.
It works against you on debt: unpaid card interest joins the balance and is charged interest itself.
Example
$10,000 at 5%, left for 10 years
- Compounded monthly
- Interest added each month
- $16,470
- Simple interest
- Interest on the $10,000 only
- $15,000
- Interest on interest
- What compounding adds
- $1,470
What it grows to$16,470
$10,000 you put in$6,470 of interest
Where you’ll see it on RateHerald
Related terms
- APY (annual percentage yield)The percentage a deposit earns in a year, counting compounding: the figure banks must quote for savings accounts, money market accounts and CDs.
- High-yield savings accountAn insured savings account that pays well above the national average APY, usually at online banks, while keeping your money available to withdraw.
- CD (certificate of deposit)A bank deposit that earns a fixed APY for a set term, from a few months to five years or more, in exchange for a penalty if you withdraw early.