What Is Compound Interest?
Compound interest is interest calculated on both your initial principal and all previously accumulated interest. Unlike simple interest, which only grows on the original amount, compound interest snowballs — your money earns money on its money. The formula is: A = P(1 + r/n)^(nt), where P is principal, r is annual rate, n is compounding frequency, and t is time in years. Even small amounts invested early grow dramatically over decades.
Frequently Asked Questions
What is compound interest? ▼
Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. Unlike simple interest (which only earns on the original amount), compound interest grows exponentially — your money earns money on its money.
How often should interest compound? ▼
More frequent compounding means slightly faster growth. Daily compounding grows marginally faster than monthly, which is faster than annual. For most savings accounts and investments, monthly compounding is standard. The difference between monthly and daily compounding on $10,000 at 5% over 10 years is less than $20.
What is the Rule of 72? ▼
Divide 72 by your annual interest rate to estimate how many years it takes to double your money. At 8% annual return, your money doubles in approximately 9 years (72 ÷ 8 = 9). At 6%, it takes 12 years. At 10%, just 7.2 years.
Why does starting early matter so much? ▼
Compound interest is exponential — the growth accelerates over time. The last 10 years of a 30-year investment generate more wealth than the first 20 years combined. Investing $200/month from age 25 to 65 at 8% generates about $700,000 more than starting at 35, despite investing only $24,000 more.