Compound interest is interest calculated on both your original principal and the interest that's already accumulated — meaning your money starts earning a return on its own returns, not just on what you originally put in.
Compound interest follows the formula A = P × (1 + r/n)^(n×t), where P is your principal, r is the annual rate, n is how often it compounds per year, and t is time in years. The variable that matters most, by far, is time — someone who starts investing years earlier ends up with significantly more than someone who starts later with the same monthly contributions, even if they invest for fewer total years.
Use the Compound Interest Calculator on this site to see exactly how your own numbers play out over time, including a year-by-year breakdown.
In Canada, the account you hold your investments in changes how much of that compound growth you actually keep. A TFSA (Tax-Free Savings Account) shelters all growth from tax completely — no tax on gains, ever, even at withdrawal. An RRSP (Registered Retirement Savings Plan) defers tax until you withdraw the money, typically in retirement when your tax bracket may be lower. Compare a non-registered account, where you'd owe tax on gains and dividends every year, against either of these — the difference compounds significantly over decades.
Informational content, not financial, tax, or legal advice. Verify amounts, limits, and current conditions directly with official sources (CRA, CDIC, OSFI) before making a decision.
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