Interest earned on a balance is added to it and then earns interest itself. The longer the period, the bigger the difference compared with simple interest.
An example
€10,000 at 5% a year becomes €10,500 after one year and €11,025 after two: in the second year the €500 of interest also earns a return.
Learn more
- What changes if you contribute at the start of the month?
- How much of the final balance did you put in?
- What does one point of annual fees cost over the long run?
Related terms
Simple interestAPR / APY (annual equivalent rate)Real return