Compound Interest Explained
Compound interest is how small, consistent contributions turn into serious wealth. See the formula, the rule of 72, and real examples.
What is compound interest?
Compound interest means you earn interest on both your original principal and the interest that has already been added to the balance. Over long periods, this snowball effect produces exponential growth.
The compound interest formula
[ A = P(1 + r)^n ]
Where:
- A = ending balance
- P = starting principal
- r = interest rate per period
- n = number of periods
For monthly compounding with regular contributions, the formula expands to account for each deposit. Our compound interest calculator handles that for you.
Real example: $200/month at 7% annual return
If you save $200 per month for 30 years and earn an average annual return of 7% (compounded monthly):
- Total contributions: $72,000
- Ending balance: ~$243,000
- Interest earned: ~$171,000
Your money more than triples thanks to compound growth.
The Rule of 72
A quick way to estimate doubling time:
[ \text{Years to double} \approx \frac{72}{\text{annual rate}} ]
At 7.2% per year, your money doubles roughly every 10 years. At 10%, it doubles every ~7.2 years.
Why starting early matters
Two people both invest $300/month at 7%:
- Alex starts at 25 and stops at 35 (10 years, $36,000 total).
- Jordan starts at 35 and invests until 65 (30 years, $108,000 total).
At age 65, Alex ends with more money than Jordan, despite contributing one-third as much. Time is the most powerful variable.
The cost of waiting
Every year you delay, you lose not just that year's contribution but all the future compounding it would have generated. The best time to start was yesterday; the second best time is today.
Calculate your own growth
Use the compound interest calculator to project your savings, investments, or retirement contributions.