Finance
How does compound interest work?
Compound interest works by paying interest on both your original money and the interest it has already earned. Each period the balance grows a little more, and that larger balance earns even more next time — accelerating growth.
See it in motion.
Watch a 2-minute animated lesson that shows exactly how compound interest works.
Step by step
- 1Period one: you earn interest on your initial deposit (the principal).
- 2Period two onward: you earn interest on the principal plus all prior interest.
- 3More frequent compounding (monthly vs yearly) grows the balance faster.
- 4Time is the biggest factor — the longer it runs, the more dramatic the snowball.
Frequently asked questions
- How is it different from simple interest?
- Simple interest is paid only on the principal; compound interest is paid on the principal plus all accumulated interest.
- What is the Rule of 72?
- Divide 72 by the annual interest rate to estimate how many years it takes your money to double.
- Does compounding frequency matter?
- Yes — the more often interest is added, the sooner you earn interest on interest, slightly boosting returns.