Compound Interest
Interest calculated on both the principal and previously earned interest — 'interest on interest'.
Compound interest is interest calculated on the initial principal plus any interest already earned. This distinguishes it from simple interest, where interest is only calculated on the principal.
Basic formula
A = P × (1 + r/n)^(n × t)Why it matters
With compound interest, your balance grows exponentially — not linearly. The longer you invest and the more frequently interest compounds, the more powerful the effect.
Quick example: €10,000 at 8% for 20 years:
- Simple interest → €26,000
- Monthly compound interest → €49,268
The difference is nearly €23,000 — from compounding alone.