Compound Interest
Interest that earns interest — the most powerful force in personal finance.
What Is Compound Interest?
Compound interest is interest calculated on both the original principal and the interest that has already been earned or charged. Unlike simple interest — which is calculated only on the principal — compound interest snowballs over time, making it the engine behind long-term investment growth and the reason high-interest debt is so dangerous.
Albert Einstein (supposedly) called it the "eighth wonder of the world." Whether or not he said that, the math backs it up.
How Does Compound Interest Work?
The formula for compound interest is:
- A = final amount
- P = principal (starting amount)
- r = annual interest rate (decimal)
- n = times interest compounds per year
- t = number of years
Compounding frequency matters. Daily compounding grows faster than monthly, which grows faster than annual. Most savings accounts compound daily; most loans compound monthly.
Real Example with Numbers
You invest $10,000 at 7% annual return (roughly the historical S&P 500 average after inflation). Here's what happens:
| Years | Simple Interest | Compound Interest |
|---|---|---|
| 10 | $17,000 | $19,672 |
| 20 | $24,000 | $38,697 |
| 30 | $31,000 | $76,123 |
| 40 | $38,000 | $149,745 |
At 40 years, compound interest generates nearly 4× more wealth than simple interest — with the same $10,000 investment.
Why Compound Interest Matters
For investors: Compound interest is how ordinary people build extraordinary wealth. Starting at 25 instead of 35 can more than double your retirement balance — even if you invest the same total amount.
For borrowers: Credit card interest compounds monthly (or even daily). A $5,000 balance at 24% APR left unpaid for 5 years grows to over $14,500. Compound interest works against you just as powerfully as it works for you.
The Rule of 72 is a quick way to see compounding in action: divide 72 by your interest rate to get the approximate years to double your money. At 7%, money doubles every ~10 years.
Calculate It Yourself
See exactly how your money grows with our free compound interest and investment calculators.