What is Compound Interest?
Compound interest is "interest on interest." It is the mathematical process where the yield you earn on an investment or High-Yield Savings Account (HYSA) is reinvested, so in subsequent periods you earn returns on both your original principal and all previously accumulated interest.
The Math Behind the Magic
The standard compound growth formula is:
- A = P(1 + r/n)^(nt) — where P is starting principal, r is annual nominal interest rate, n is compounding frequency per year, and t is time in years.
If you invest $10,000 at a 10% annual return:
- Year 1: You earn $1,000. Balance = $11,000.
- Year 2: You earn 10% on $11,000 ($1,100). Balance = $12,100.
- Year 3: You earn 10% on $12,100 ($1,210). Balance = $13,310.
- Year 30: That original $10,000 (with zero additional contributions) grows to $174,494.