The Power of Compound Interest
What is compound interest?
Compound interest is when earned interest is added to the principal and then earns interest itself. Each period, the base grows, so the next period's interest is calculated on a larger amount.
Compound vs simple interest
Simple interest adds a fixed amount each period, while compound interest snowballs because it is calculated on principal plus accumulated interest. Over long periods the difference becomes enormous.
Compare them yourself: Compound Interest Calculator.
Four ways to maximize compounding
- Start early — time is the one variable you cannot recover.
- Reinvest earnings — compounding only works if you leave gains invested.
- Use tax-advantaged accounts — ISA, pensions, or 401(k) reduce tax leakage.
- Contribute consistently — steadiness supports compounding more than chasing returns.
Simulate it with our calculators
Frequently Asked Questions
What is the biggest difference between compound and simple interest?
Simple interest is earned only on the principal, while compound interest is earned on the principal plus accumulated interest. The gap widens exponentially over time.
What matters most to maximize compounding?
Starting earlier and keeping interest reinvested matter most. Return rate helps, but time is the irreplaceable variable.
How do taxes affect compounding?
Taxes erode compounding. Tax-advantaged accounts like ISA, pensions, or 401(k) reduce leakage and boost real compounding.