Compound Interest

Compound interest is interest calculated on both the initial principal and accumulated interest from previous periods. It is "interest on interest" and makes investments grow faster than simple interest.

Formula: A = P(1 + r/n)^(nt), where A = final amount, P = principal, r = annual rate, n = compounding frequency, t = time in years. With regular contributions, additional formula applies for periodic deposits.

Monthly compounding calculates interest 12 times per year, yearly only once. Monthly compounding results in slightly higher returns because interest is added more frequently, allowing it to compound more often.