What Is Compound Interest | Investor's Almanac

Compound interest is interest accumulated from a principal sum and previously accumulated interest, resulting from reinvesting or retaining interest that would otherwise be paid out. It differs from simple interest, where previously accumulated interest is not added to the principal amount of the current period. Compound interest depends on the simple interest rate applied and the frequency at which the interest is compounded, making it a powerful tool for growing savings or investments over time. Understanding compound interest is crucial for making informed decisions about personal finance, investing in stocks, and managing debt. The concept of compound interest is also closely related to time value of money, which is the idea that a dollar today is worth more than a dollar in the future.