Compound interest

Compound interest, or the compounding effect, is a fundamental financial concept. Under this concept, interest is earned not only on the original investment amount but also on the accumulated earnings.

After each interest period, the investor receives interest on the balance. For savings or time deposit accounts, this typically occurs once a year; for bond coupons and stock dividends, it may occur more frequently depending on the company’s domicile. If the interest is not distributed but reinvested directly, it earns interest in the next interest period along with the deposited principal. Reinvesting the interest thus allows the interest to earn interest – the so-called compound interest.

For the investor, the compound interest effect has the positive result that capital growth accelerates from one interest period to the next. This happens because both the principal earning interest and the interest income grow steadily. In this way, asset growth continuously gains momentum and follows an exponential pattern.

With True Wealth's compound interest calculator, you can calculate how your assets will develop over time.