Compound Interest Explained Simply: How Your Money Grows

What is Compound Interest?

Compound interest is interest earned on both your original money AND on interest you've already earned. It's often called "the eighth wonder of the world" - and for good reason.

Simple interest: You earn interest only on your initial deposit. Compound interest: You earn interest on your deposit AND on all the interest that has accumulated.

A Simple Example

You invest $10,000 at 7% annual return:

After 10 years:

• Simple interest: $17,000
• Compound interest: $19,672

After 30 years:

• Simple interest: $31,000
• Compound interest: $76,123

The difference grows dramatically over time. Try it yourself with our Compound Interest Calculator.

The Compound Interest Formula

A = P(1 + r/n)^(nt)

Where:

• A = final amount
• P = principal (initial investment)
• r = annual interest rate (decimal)
• n = number of times compounded per year
• t = number of years

The Three Factors That Matter Most

1. Time (Most Important)

Starting early is the single most powerful factor. Someone who invests $200/month from age 25 will have MORE money at 65 than someone who invests $400/month starting at 35.

2. Rate of Return

Even small differences in rate make huge differences over time:

• $10,000 at 5% for 30 years = $43,219
• $10,000 at 7% for 30 years = $76,123
• $10,000 at 10% for 30 years = $174,494

3. Regular Contributions

Adding money regularly supercharges compound interest. $100/month at 7% for 30 years turns into $121,997 - you contributed $36,000 and earned $85,997 in interest.

Compounding Frequency

How often interest compounds affects your returns:

• Annually: Once per year
• Quarterly: Four times per year
• Monthly: Twelve times per year
• Daily: 365 times per year

More frequent compounding = slightly higher returns. Monthly vs annual compounding on $10,000 at 7% over 30 years: $81,165 vs $76,123.

The Rule of 72

Quick mental math: divide 72 by your interest rate to estimate how many years it takes to double your money.

• At 6%: 72/6 = 12 years to double
• At 8%: 72/8 = 9 years to double
• At 10%: 72/10 = 7.2 years to double

Compound Interest Works Against You Too

Credit card debt, mortgages, and loans also use compound interest - but in reverse. A $5,000 credit card balance at 20% APR, paying only minimums, takes over 25 years to pay off and costs over $12,000 in interest.

Use our Loan Calculator to see the true cost of borrowing, or our Debt Payoff Calculator to create a repayment plan.

Practical Tips

1. Start today - even small amounts benefit enormously from time

2. Automate contributions - set up automatic monthly transfers

3. Reinvest dividends - let your earnings compound

4. Minimize fees - even 1% in annual fees significantly reduces long-term growth

5. Be patient - compounding is slow at first, then explosive

6. Account for inflation - use our Inflation Calculator to see real purchasing power

Plan Your Financial Goals

• Calculate your savings goal timeline
• Plan for retirement
• Understand how inflation affects your money