Compounding comes with its own vocabulary. Here are the terms you will meet most often, in plain English, with links when we cover a topic in depth.

Core Terms

  • •<strong>Principal:</strong> The original amount you put in, before any interest.
  • •<strong>Interest:</strong> The cost of borrowing or the reward for saving, expressed as a rate.
  • •<strong>Compound interest:</strong> Interest earned on principal <em>and</em> on previously earned interest. See the formula guide.
  • •<strong>Simple interest:</strong> Interest on principal only — no earnings on earnings.
  • •<strong>APY:</strong> Annual Percentage Yield — the real yearly savings earn after compounding. More in APY vs APR.
  • •<strong>APR:</strong> Annual Percentage Rate — the yearly borrowing cost before compounding.
  • •<strong>Compounding frequency:</strong> How often interest is calculated and added (annual, quarterly, monthly, daily).

Account and Tax Terms

  • •<strong>Tax-advantaged account:</strong> An IRA, 401(k), or similar account where growth is tax-deferred or tax-free.
  • •<strong>Tax-deferred:</strong> You pay tax later (typically at withdrawal), not yearly.
  • •<strong>RMD (Required Minimum Distribution):</strong> The annual amount you must withdraw from certain retirement accounts after a set age.
  • •<strong>Dividend reinvestment:</strong> Using dividends to buy more shares instead of taking cash — compounding through share count.
  • •<strong>Annuity:</strong> A contract that pays a stream of income, often used for retirement.

Planning Terms

  • •<strong>Rule of 72:</strong> Divide 72 by a rate to estimate years to double. Full explainer here.
  • •<strong>CAGR:</strong> Compound Annual Growth Rate — a smooth yearly rate over a period. See what is CAGR.
  • •<strong>Inflation:</strong> The rise in prices that erodes purchasing power over time. Model it with the inflation calculator.
  • •<strong>Real return:</strong> Return after subtracting inflation — what you actually gain in purchasing power.
  • •<strong>Time horizon:</strong> How long until you need the money; the single biggest lever in compounding.

Keep this list handy. The more of these terms feel routine, the easier every other guide on the site becomes.

<strong>Disclaimer:</strong> The content provided on CompoundFig is for educational and informational purposes only and does not constitute financial, tax, legal, or investment advice. All calculations and projections are hypothetical and based on assumed rates of return, which may not reflect actual market conditions. Individual results will vary. Consult a qualified financial professional before making decisions. CompoundFig does not provide personalized financial recommendations.