Compounding frequency.
In plain English
Compounding frequency is the number of times in a year that interest is calculated and added to the principal, commonly daily, monthly, quarterly, or once annually. Once interest is added, it becomes part of the base that earns or owes interest in the next period. More frequent compounding always favors whoever is receiving the interest. The gain from added frequency shrinks quickly: most of the difference sits between annual and monthly, and daily adds very little on top of that.
01Why it matters
Two offers with the same headline rate are not the same offer, and the schedule buried in the terms decides which one actually pays or costs more.
02The math, step by step
10,000 dollars at 6 percent for 10 years. Compounded annually: 10,000 x 1.06^10 = 17,908 dollars. Compounded monthly: 10,000 x (1 + 0.005)^120 = 18,194 dollars. Same rate, same decade, 286 dollars apart on the schedule alone.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
It is not the payment schedule. An account can compound daily and credit the interest monthly. Compounding is when interest joins the base that earns more interest. Crediting is when it shows up as a line on the statement.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice