What Is Compound Interest?

Q: What is compound interest in simple terms?

Interest calculated not just on your original money but also on the interest already earned — so your balance grows faster every period. It's often called the eighth wonder of the world.

Q: What is the compound interest formula?

A = P(1 + r)^n, where P is the starting amount, r the rate per period, and n the number of periods. For example, €10,000 at 5% for 10 years: 10,000 × 1.05^10 ≈ €16,289.

Q: What is the rule of 72?

Divide 72 by the annual interest rate to estimate the years needed to double your money. At 6%, that's 72 ÷ 6 = 12 years.

Q: Does compounding frequency matter?

Yes, slightly. Monthly compounding beats annual compounding at the same nominal rate, because interest starts earning interest sooner. The difference is small but real over decades.

In short: compound interest = interest on interest. Formula: A = P(1+r)ⁿ. Run the numbers free →

The formula, with a worked example

A = P(1 + r)ⁿ — P = starting amount, r = rate per period, n = number of periods.

Invest €10,000 at 5% per year for 10 years: A = 10,000 × 1.05¹⁰ ≈ €16,289. With simple interest you'd have only €15,000 — compounding added an extra €1,289 "for free". Stretch it to 30 years and the gap explodes: ≈ €43,219 vs €25,000.

The rule of 72

Want a quick estimate without a calculator? Divide 72 by the annual rate to get the years needed to double your money. At 6%: 72 ÷ 6 = 12 years. At 8%: just 9 years. It also works in reverse — a credit card at 24% doubles your debt in roughly 3 years if you pay nothing.

Compounding frequency matters

Interest can compound yearly, monthly, daily — or continuously. More frequent compounding means interest starts earning interest sooner, so monthly beats annual at the same nominal rate. Banks quote the AER/APR (annual equivalent rate) precisely so you can compare offers with different frequencies on equal footing.

❓ Compound Interest FAQs