Compound Interest
Quick Definition
Interest calculated on both the principal and previously earned interest, accelerating growth.
Full Explanation
Compound interest is interest calculated not just on the original principal, but also on accumulated interest from prior periods — effectively 'interest on interest.' It is the fundamental driver of wealth building through investing and debt escalation through borrowing. The formula is A = P(1 + r/n)^(nt). In Canada, savings and investment accounts compound daily, monthly, or annually. Mortgage interest compounds semi-annually by law. The Rule of 72 states that dividing 72 by the interest rate gives the approximate number of years to double your money (e.g., 7% return = ~10 years to double).
Related Terms
Interest Rate
The percentage charged on the principal loan balance per period.
Savings Rate
The percentage of income saved rather than spent, a key indicator of financial health.
Amortization
The total length of time to pay off a loan through scheduled payments.
RRSP (Registered Retirement Savings Plan)
A tax-deferred savings account for retirement, with deductible contributions.
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