What Is Compound Interest?

Compound interest is interest earned on both your original balance and the interest you have already accumulated.

This means your savings can grow faster over time because each new interest calculation can be based on a larger balance.

KOHO High Interest Savings

It is a prepaid Mastercard, so you spend your own money while still earning high interest.

With KOHO High Interest Savings, you can:

• Grow your savings up to 3.5% interest

• Earn a 2% cash back rate on groceries, eating, drinking, and transportation and 0.5% cash back on everything else

• Unlimited transactions and free e-transfers

• No minimum balance required, ever

How does compound interest work?

Compound interest builds on itself. Instead of earning interest only on the money you originally deposited, you can also earn interest on interest that was added to your balance previously.

For example, suppose you put $1,000 into an account earning 5% interest annually, compounded once per year:

• After one year, you would have $1,050.

• In the second year, the 5% would be calculated on $1,050 instead of the original $1,000.

• You would finish the second year with $1,102.50.

That extra $2.50 comes from earning interest on the $50 of interest you earned during the first year.

What is the compound interest formula?

A common formula for compound interest is:

A = P(1 + r)ⁿ

Where:

• A = the amount you have at the end

• P = your starting principal

• r = the interest rate per compounding period

• n = the number of compounding periods

The longer your money remains invested or saved, the more opportunity compounding has to work.

Compound interest vs. simple interest

Simple interest is calculated only on your original principal. Compound interest can be calculated on your principal plus previously earned interest.

For example, with simple interest, $1,000 earning 5% annually would earn the same $50 each year. With compound interest, the amount of interest earned can increase as your balance grows.

How often can interest compound?

Interest can be compounded at different intervals depending on the account or financial product, such as:

• Daily

• Monthly

• Quarterly

• Annually

Generally, more frequent compounding allows interest to begin earning additional interest sooner, although the interest rate and account terms also affect how much you ultimately earn.

Why does compound interest matter?

Compound interest rewards time and consistency. Starting to save earlier gives your money more time to potentially earn interest on previous interest, while regularly adding to your savings can increase the balance that has the opportunity to grow.

Even relatively small amounts can become more meaningful when they are left to compound over a long period.