What Is Compound Interest?
Compound interest explained simply: how earning interest on your interest makes savings grow — and debts balloon — over time.
Try the numbers yourself
Open the Compound Interest Calculator →More interest guides
Frequently asked questions
What is compound interest in simple terms?
It is interest paid on your original amount plus the interest already added. Each period you earn interest on a larger balance, so growth accelerates.
How is compound interest different from simple interest?
Simple interest is calculated only on the original amount. Compound interest is calculated on the original amount plus previously earned interest, so it grows faster.
Does compounding frequency change the result?
Yes. Compounding more often — monthly or daily instead of yearly — produces a slightly higher balance because interest begins earning interest sooner.
Is compound interest good or bad?
Both. It powerfully grows savings and investments, but it also makes debts such as credit cards grow quickly if balances are not paid off.
What Is Compound Interest?
Compound interest is interest calculated on both your original money and the interest it has already earned. Because each period’s interest is added to the balance, the next period earns interest on a bigger number — so growth speeds up over time.
A simple example
Put 1,000 into an account paying 5% a year, compounded yearly. After one year you have 1,050. In year two you earn 5% on 1,050, not 1,000 — and after 10 years the balance is about 1,628.89, even though you never added a penny.
Why it matters
The same force works for and against you. It grows savings and investments, but it also makes credit‑card balances and loans grow quickly when interest is added to what you already owe.
Compounding frequency
Interest can compound yearly, monthly, daily or continuously. The more often it compounds, the slightly faster the balance grows, because interest starts earning interest sooner.
Examples are illustrative and for general education, not financial advice.
Results are estimates for general guidance in Germany and may not reflect the latest local rates, fees or rules. Check official sources before making decisions.