When something earns compound interest, it earns interest on both the original amount (the principal) and on the interest that has been added in previous periods.

Quick Scoop: Core Idea

  • With compound interest, each period’s interest is calculated on:
    • The starting principal, plus
    • All the interest that has been added before (often called “interest on interest”).
  • This makes the balance grow faster over time than with simple interest, where you only earn interest on the original principal.

Put simply:

When something earns compound interest, it earns interest on the principal and on previously earned interest.

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