Compound interest, explained calmly
The most quoted concept in personal finance, with no shortcuts and no promises.
With simple interest, the return is always calculated on the initial amount. With compound interest, it is calculated on the accumulated amount, which already includes the previous interest. That is why people talk about interest on interest.
The formula
The final amount equals the initial capital multiplied by one plus the rate, raised to the number of periods. In symbols: A = P × (1 + r) to the power of t. Rate and time must use the same unit, such as months with a monthly rate.
Time is the strongest variable
Because time is the exponent, the difference between the two regimes is small at first and grows with every period. That explains why starting early often matters more than the size of the first contribution.
The other side
The same logic applies to debt. Credit card and overdraft interest also compound on themselves, usually at much higher rates than those of conservative investments.
