The compound interest formula calculates the future value of an investment by accounting for the effect of compounding. Unlike simple interest, where interest is only earned on the initial principal, compound interest allows you to earn interest on your interest.

The most critical variable is 'n', the compounding frequency. The more frequently interest compounds (e.g., daily instead of annually), the faster the balance grows. The exponent 'nt' represents the total number of compounding periods over the life of the loan or investment.