---
title: "What is compound interest?"  
description: "What is compound interest?"  
author: "Baishakhi Ghosh"  
published: 2023-10-12  
updated: 2023-10-14  
canonical: https://answers.mindstick.com/qa/103167/what-is-compound-interest  
category: "finance"  
tags: ["finance"]  
reading_time: 2 minutes  

---

# What is compound interest?



## Answers

### Answer by Saumya Mishra

**In compound interest, interest is figured upon the original [sum](https://www.mindstick.com/interview/1418/what-is-the-way-for-summing-up-a-column-in-a-table-in-microsoft-access-database) plus the accrued interest of prior period/s. This translates into earning interest on your interest thus resulting in your saving growing at a compounding rate of return.** The formula for compound interest is: A = P(1 + r/n)^(nt) where: A is the final amount P is the principal amount r is the interest rate n = Number of Compounding Periods per Year. It means that in two years.

- Suppose you invest, say $1,000 at a rate of 5 percent compounded yearly. At the end of year one, you’ll have made $50 in interest and your new total balance will be $1,050. Interest earned in the second year is $52.50 on a remaining balance of $1,050. And so on.
- The power of compounding is great over a prolonged period. Say, if you put $1000 at a rate of 5% per year compounded and reinvest the profits for 20 years, it’ll grow up to more than $3800.
- You can make use of compound interest in saving money towards [retirement](https://www.mindstick.com/articles/116086/how-to-age-with-no-regrets-infographic) or any [future](https://www.mindstick.com/articles/198794/the-future-focused-learning-the-rundown-of-stem-education) prospectives. Although, it may also [increase](https://www.mindstick.com/news/2333/mahindra-s-q4-profit-increased-by-46-as-vehicle-sales-increased-by-75) [debt](https://www.mindstick.com/articles/44399/strategies-for-managing-small-business-debt) costs. The [instance](https://www.mindstick.com/forum/1739/object-reference-is-not-set-to-an-instance-of-an-object-error-in-my-code) is where in case of having a high interest rate [credit](https://www.mindstick.com/articles/85765/building-your-credit-score-when-you-re-an-uber-driver) card; you will end owing more due to interest charges on the outstanding balances that are not settled completely in one month. Some [tips](https://www.mindstick.com/articles/156918/7-tips-on-selecting-a-family-divorce-lawyer) for [mutual funds](https://www.mindstick.com/articles/44787/benefit-with-systematic-investment-plan-advantage).

**Start saving early**. The earlier you save, the longer your money has to grow.

**Invest regularly**. Saving even a small sum of money every month will build up eventually.

**Invest in assets with high interest rates and compound interest.**

**Reinvest your earnings**. You are therefore able to use your earnings as capital to purchase more [investments](https://www.mindstick.com/news/2678/5g-services-in-india-to-attract-rs-1-5-lakh-crore-in-investments-in-2023) in order to increase their expansion rate.


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Original Source: https://answers.mindstick.com/qa/103167/what-is-compound-interest

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