Glossary – Compound interest

Compound interest is interest earned on interest that was previously received. For example, if you started with $1,000 (principal) in a savings account and earn 5% interest per year, your account would have $1,050 after the first year. The following year, the 5% interest would be calculated on $1,050, which includes your principal and the previous year’s interest ($50). The interest gained in the second year would be $52.50, raising your account to $1,102.50. As your principal and accumulated interest continues to rise, it generates greater gains through interest each year.