Why compound interest grows differently
Compound interest adds earned interest back to the balance. That means later interest can be calculated on both the original principal and previously earned interest.
Compound interest formula
A common formula is A = P(1 + r/n)^(nt). Here, A is the ending balance, P is principal, r is the annual rate as a decimal, n is the number of compounding periods per year, and t is years.
Example
If $10,000 grows at 5% for 4 years with monthly compounding, use 12 compounding periods per year. The result is slightly higher than annual compounding because interest is added to the balance more often.
What compounding frequency changes
Monthly, quarterly, annual and daily compounding can produce different outcomes at the same nominal annual rate. The difference is usually modest at low rates and short terms, but it becomes more noticeable over longer periods.
Use the Compound Interest Calculator to compare frequencies side by side.