Compound interest explained: how money grows over time
Compound interest is the single most important idea in personal finance: you earn returns not just on your money, but on the returns it already earned. Given enough time, that snowball does most of the work.
Interest on interest
With simple interest, you only ever earn on the original principal. With compound interest, each period’s gains are added to the balance, so the next period earns on a bigger number. The gap between the two starts small and becomes enormous over decades.
Try it: $10,000 at 8% for 20 years grows to about $46,610 with annual compounding — and even more with monthly contributions, in the Compound Interest Calculator.
Why time beats rate
Because growth compounds, the early years matter most — they have the longest to multiply. Someone who invests for 10 years then stops often ends up ahead of someone who starts 10 years later and never stops. Starting early is the cheapest edge in investing.
The rule of 72
For a quick estimate, divide 72 by your annual return to find the years to double your money. At 8% that’s about 9 years; at 6%, about 12. It’s rough, but great for mental math.
Frequently asked questions
- What is the difference between simple and compound interest?
- Simple interest is always calculated on the original principal. Compound interest is calculated on the principal plus previously earned interest, so the balance grows faster over time.
- How often should interest compound?
- More frequent compounding (monthly vs. annually) produces slightly more at the same nominal rate because earnings start compounding sooner. The effect grows with higher rates and longer time horizons.
- What return rate should I assume for investing?
- A diversified stock portfolio has historically returned roughly 7–10% per year before inflation over the long run, though any single year varies widely. Model conservatively for short horizons.
Run your own numbers
Put this guide into practice — these calculators run free in your browser.