Finance Quick Answers
This article is part of the Missouri Saves Program
What is compound interest?
Compound interest occurs when interest is earned on a principal sum along with any accumulated interest on that sum. In other words, you're earning interest on interest. This principal helps your money grow. For example, if you deposit $100 and the interest rate is 5% each year. At the end of year one, you will have $105. At the end of year two, the compound interest is calculated by multiplying 5% by $105. At the end of year two, you would have $110.25. At the end of each year, interest is calculated on the amount in the account.
Check out "The
Miracle of Compound Interest" to see the difference
compound interest makes.
Dr. Joyce Cavanagh, Former Assistant Professor and State Specialist, Consumer and Family Economics
Last update: Friday, July 25, 2008