What Is Compound Interest?

Compound interest is the interest you earn on both your initial deposit (the principal) and the interest that has already been added to it. Unlike simple interest, which only calculates interest on the original amount, compound interest creates a snowball effect where your money grows at an accelerating rate over time.

The frequency of compounding matters. Interest can compound annually, quarterly, monthly, or even daily. The more frequently interest compounds, the faster your money grows. Most savings accounts compound daily, while many investment returns compound annually.

Albert Einstein is often credited with calling compound interest the "eighth wonder of the world," and while the attribution is debated, the sentiment is accurate. A single dollar invested at 10% annual return grows to $2.59 in 10 years, $6.73 in 20 years, and $17.45 in 30 years -- without adding a single extra dollar.