Compound Interest

Personal Finance

Compound interest is interest earned on both the original principal and on the accumulated interest from previous periods. It's the mathematical force behind long-term wealth building and the reason starting to invest in your 20s vastly outperforms starting in your 30s. The formula is A = P(1 + r/n)^(nt), where P is principal, r is the annual rate, n is compounding periods per year, and t is years. A $10,000 investment at 8% compounded monthly for 30 years grows to $109,357. Reverse the lens and compound interest works against you on credit card debt — a $5,000 balance at 22% APR doubles in three years if untouched.