What is compound interest?
Compound interest is interest calculated on both your initial amount and the accumulated interest from previous periods.
Compound interest is interest calculated on your principal (the original amount) plus all the interest you've already earned. It's interest on interest. Over time, this snowball effect can grow your savings significantly faster than simple interest.
It works against you with debt too. Credit card balances, for example, compound daily — meaning you pay interest on yesterday's interest. The more frequently interest compounds, the faster the growth (or the cost).
Key facts
- •Interest is calculated on principal plus previously earned interest
- •Compounding frequency matters — daily, monthly, and annually all produce different results
- •Over long periods, compound interest creates exponential growth
- •Works in your favour with savings and investments, against you with debt
- •Albert Einstein (allegedly) called it the eighth wonder of the world
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Compound Interest CalculatorFrequently asked questions
What's the difference between simple and compound interest?
Simple interest is calculated only on the original principal. Compound interest is calculated on the principal plus accumulated interest. Over time, compound interest grows much faster.
How often does compound interest compound?
It depends on the product. Savings accounts typically compound daily or monthly. Term deposits may compound at maturity. Mortgages usually compound daily. The more frequent the compounding, the greater the effect.
General information and estimates only — not financial, tax, or legal advice. Always verify with a licensed adviser or the ATO.