What is Compound Growth?

Compound growth occurs when earnings—interest, dividends, or capital gains—are reinvested to generate their own earnings in subsequent periods. Unlike simple interest, which pays only on the original principal, compound growth pays on the principal plus all accumulated earnings. Over extended periods, the difference between simple and compound growth is not incremental but exponential.

The mathematical expression is A = P(1 + r/n)^(nt), where A is the final amount, P is the starting principal, r is the annual rate of return, n is the number of compounding periods per year, and t is the number of years. Even modest differences in the rate of return or the time horizon produce dramatically different outcomes because the growth accelerates in the later years of the compounding period.

The SEC’s Office of Investor Education and Advocacy highlights compound growth as the single most important concept for long-term investors to understand. The office maintains a compound interest calculator at Investor.gov that allows consumers to model different contribution levels, rates of return, and time horizons. The key variable under the investor’s control is time: starting early matters more than earning a slightly higher return, because each additional year of compounding adds to the exponent in the growth equation.