Albert Einstein allegedly called compound interest "the eighth wonder of the world." Whether he said it or not, the concept is powerful: earning interest on your interest creates exponential growth over time.
What Is Compound Interest?
Simple interest is earned only on your principal. Compound interest is earned on your principal **plus** any accumulated interest. This means your money grows faster the longer it's invested.
The Formula
**A = P × (1 + r/n)^(n×t)**
- A = Final amount
- P = Principal (initial investment)
- r = Annual interest rate (as a decimal)
- n = Number of times interest is compounded per year
- t = Number of years
A Powerful Example
Invest $10,000 at 7% annual return for 30 years, compounded monthly:
- After 10 years: $20,097
- After 20 years: $40,389
- After 30 years: $81,317
Your money more than doubles every 10 years. That's the power of compounding.
The Rule of 72
A quick way to estimate doubling time: divide 72 by your annual interest rate. At 7%, your money doubles in about 10.3 years (72/7). At 10%, it doubles in 7.2 years.
Compounding Frequency Matters
More frequent compounding means slightly higher returns:
- Annual: $10,000 at 5% for 10 years = $16,289
- Monthly: $10,000 at 5% for 10 years = $16,470
- Daily: $10,000 at 5% for 10 years = $16,487
The difference is small but grows over time.
Starting Early Is Key
The earlier you start, the more time compounding has to work. Someone who invests $5,000/year from age 25-35 ($50,000 total) and then stops will have more at age 65 than someone who invests $5,000/year from age 35-65 ($150,000 total) — assuming the same return rate.
How to Maximize Compound Interest
1. **Start now**: Time is the most important factor 2. **Reinvest dividends**: Don't withdraw earnings 3. **Increase contributions**: Even small increases compound significantly 4. **Choose investments wisely**: Higher returns mean faster growth, but with more risk
Use our Compound Interest Calculator to see how your savings can grow, or try our Investment Calculator for scenarios with regular contributions.