Compound interest

Compound interest is interest calculated on both an original principal and interest previously added to it. Its growth depends on the rate, compounding frequency, and time.

Principal (finance): The initial sum of money lent, invested, or deposited, before interest or other returns. Compound interest accumulates on this original amount as well as on later interest.
Compound annual growth rate: A rate describing the smoothed annual growth of an investment between two values over a stated period. It summarizes compound growth across multiple years as one annual rate.
Simple interest: Interest calculated only on the original principal, without adding previously earned interest to the base. It lacks the interest-on-interest effect that defines compound interest.
Time value of money: The principle that money available now has a different value from the same amount available later. Compounding quantifies how invested money can grow while time passes.
Interest rate: The proportion of a loan or investment charged or earned as interest over a stated period. The rate determines how much each compounding period adds to the balance.
Annuity: A sequence of equal payments made at regular intervals, often used in savings and retirement planning. Regular contributions can themselves earn compound interest over time.
Nominal interest rate: A stated annual interest rate that does not account for within-year compounding. The nominal rate alone does not reveal the full annual effect of compounding.
Time preference: The tendency to value a good or reward differently depending on when it is received. Interest compensates for postponing access to money, alongside other financial factors.
Compounding frequency: The number of times interest is calculated and added to principal during a stated period. More frequent additions generally produce a larger balance at the same nominal rate.
Savings account: A bank deposit account that pays interest while allowing deposits and, usually, withdrawals. Its balance can grow through recurring interest credited to the account.

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