Compound interest is the engine behind both long-term wealth and long-term debt. Each period, interest is calculated on the previous balance — which already includes earlier interest — so the curve bends upward over time. The US Securities and Exchange Commission publishes a primer at Investor.gov that every saver should read once.
How compound interest is calculated
The formula is A = P × (1 + r ÷ n)nt, where P is the starting principal, r is the annual rate (as a decimal), n is the number of compounding periods per year, and t is the number of years. The more frequent the compounding, the more you earn — though above monthly the difference is small.
Worked example
$10,000 at 5% compounded monthly for 10 years grows to $10,000 × (1 + 0.05 ÷ 12)120 ≈ $16,470.
