Compound Definition

In personal finance, to compound means to repeatedly calculate balance or balance due information on both the principal and the accrued interest. For example, on a credit card balance of $100 at 24% annual interest, the initial monthly interest charge will be calculated from the $100 principal, yielding a balance due of $102; the second monthly interest charge (assuming no payment) will be calculated from the previous balance due of $102, yielding a new balance due of $104.04—note the interest compounding itself, here indicated by the extra $0.04 charge.

Another way to think of compounding interest is to contrast the different between simple interest and compound interest, over different compounding intervals:

  • A $100 annual loan at simple interest with an annual rate of 24% yields a total balance due of $124
  • A $100 annual loan at compounding monthly interest with an annual rate of 24% yields a total balance due of $126.82
  • A $100 annual loan at compounding weekly interest with an annual rate of 24% yields a total balance due of $127.05