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Why compounding frequency matters
The same annual rate gives a different result depending on how often interest gets added to the principal. Monthly compounding adds it every month, quarterly every three months, annual once a year. Shorter periods win, but the gap is smaller than people expect — the term and the rate matter far more.
Time beats principal
Compounding accelerates over time. The first few years look barely different from simple interest, but later on interest starts earning interest on itself, and the gap widens fast. Starting early beats contributing more later.
This is pre-tax and nominal
Taxes and inflation are not included. Tax rates on interest differ by country, and inflation erodes the real value of any future amount — check a separate inflation calculator to see what a future sum is worth in today's money.
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Frequently asked questions
QWhat is the difference from simple interest?
Simple interest is only ever calculated on the original principal. Compound interest is calculated on principal plus all interest already earned, so the balance grows faster the longer it runs.
QDoes a shorter compounding period always win by a lot?
It helps, but the effect is smaller than the term length or the rate. Going from annual to monthly compounding at the same rate makes a modest difference; extending the term by a few years usually makes a bigger one.