What is Compound Interest?

Compound interest is interest earned on both the original principal and on the interest that has previously been added to the account, producing exponential growth over time.

Compound interest reinvests earned interest, so the next period's interest is calculated on a larger base. Over decades, this compounding effect dwarfs the original deposit. Albert Einstein reportedly called it the eighth wonder of the world.

Frequency matters: daily compounding produces a slightly higher annual yield than monthly or yearly. The annual percentage yield (APY) captures this effect, while the nominal rate ignores it. Regular contributions amplify the result dramatically.

Compound interest is the engine behind retirement savings, ETF investing and even debt: credit-card balances grow in exactly the same way, only against you. Starting early matters far more than the size of each contribution.

Formula

FV = P × (1 + r/n)^(n×t)
where P = principal, r = annual rate, n = compounding periods per year, t = years

Example

CHF 10,000 invested at 6% annually for 30 years grows to CHF 57,435 — without adding a single franc. Add CHF 300 per month and the same account reaches roughly CHF 350,000.

↗ Use the calculator

Compound Interest Calculator

Project the future value of investments with compounding and recurring contributions.

Open calculator →

Related terms

Interest Rate

An interest rate is the cost of borrowing money or the return for saving it, expressed as an annual percentage of the principal amount.

Inflation

Inflation is the rate at which the general price level of goods and services rises over time, reducing the purchasing power of money.

ETF

An ETF (exchange-traded fund) is a basket of securities — usually stocks or bonds — that trades on a stock exchange like a single share, providing diversification at low cost.

Dividend

A dividend is a cash payment a company makes to its shareholders out of profits, typically distributed quarterly, semi-annually or annually in proportion to shares held.

Frequently asked questions

How is compound interest different from simple interest?+

Simple interest applies only to the original principal. Compound interest also applies to all previously earned interest, producing exponential growth.

What return should I assume long term?+

Diversified global equities have delivered roughly 6–8% annually over long periods. Bonds 2–4%. Cash barely matches inflation.

Does compounding work against debt?+

Yes. Unpaid credit-card interest is added to the balance and itself earns interest the next month — debts can double in 5–7 years at typical card rates.