JagInsights › Glossary › Compound interest
What is compound interest?
Compound interest is interest calculated on the original amount and on the interest already added. A savings example and a debt example.
Compound interest means the interest itself starts earning interest. On savings, that grows the balance. On a debt you do not pay off, that grows what you owe.
Worked example
You invest $200 a month for 20 years and the account earns 7 percent a year, compounded. You put in $48,000. The balance is not $48,000, because each year's growth stays in and is part of next year's base. The same math on a card you only pay the minimum on runs the other way: unpaid interest becomes part of the balance the rate is applied to.
Why it matters
People feel compound interest as a slogan. The useful version is: leaving money in, or leaving interest unpaid, changes the base.
Questions people ask
Is a 7 percent return guaranteed?
No. A calculator uses a rate you type so you can see the shape. A real investment can return less, or lose money.
Does compounding work on a savings account?
Yes, at the account's rate, which is often much lower than a long-run stock average. The math is the same. The rate is not.
How is this different from APR?
APR is the stated yearly rate on a debt. Compounding is what happens when unpaid interest is added to the amount the rate applies to.
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