What is compound interest?

Basic Definition

In finance and economics, the term "compound interest" refers to a system in which interest on a primary amount is computed using both the original principal and the interest that has accrued over time.

Uses & Applications

Savings Accounts: Compound interest is a feature of many savings accounts that enables users to increase their savings over time by earning interest on both their initial deposit and interest accrued.

Investments: A key idea in investing is compound interest. It covers a range of investment products, including retirement accounts, equities, bonds, and mutual funds. Compound growth can be reaped over time by investors who reinvest their dividends or interest.

Retirement Planning: Compound interest is a common tool used by retirement accounts, like 401(k)s, IRAs, and pension plans, to assist people in saving for their future. Compound interest allows contributions to these accounts to grow over time, giving the account holders a retirement income stream.

Mortgages and loans: When taking out a loan, compound interest is also important. Credit cards, mortgages, and loans.