How Compound Interest Works
Compound interest earns returns on both your principal and previously earned interest. At 5% APY, $10,000 grows to $16,289 in 10 years. The more frequently interest compounds and the longer the time horizon, the more powerful the effect.
FV = P(1+r)^n + PMT x [(1+r)^n - 1] / r
Frequently Asked Questions
APY (Annual Percentage Yield) includes compounding — the actual return per year. APR does not account for compounding. For savings accounts, always compare APY. A 4.8% APR compounded monthly equals 4.91% APY.
The 50/30/20 rule suggests 20% of take-home pay toward savings and debt. For retirement, aim for 15% of gross income. Even $200/month compounded over 30 years grows significantly. Starting early matters more than the amount.