Compound Interest Explained

Albert Einstein supposedly called it the eighth wonder of the world. Compound interest is simply interest earning interest — and over time, it's the single most powerful force in building wealth.

Simple vs compound interest

Simple interest is paid only on your original amount. Compound interest is paid on your original amount plus all the interest it has already earned. That small difference becomes enormous over decades, because your money starts making money, which then makes more money.

A quick example

Invest $10,000 at 7% a year. After year one you have $10,700. In year two you earn 7% on $10,700 — not just the original $10,000. Fast-forward 30 years and that single $10,000 grows to over $76,000, without adding a cent. Watch it on the compound interest calculator.

Why time matters more than amount

The earlier you start, the more doubling cycles your money gets. A shortcut called the Rule of 72 shows it: divide 72 by your return to estimate the years to double. At 8%, money doubles roughly every 9 years — so an extra decade can mean an extra doubling or two.

Compounding frequency

Interest can compound annually, monthly, or daily. More frequent compounding earns slightly more, but the two factors that dominate are your rate of return and your time invested.

It also works against you

The same force makes credit card debt dangerous — interest compounds on what you owe. That's why paying down high-interest debt (see the debt payoff calculator) is so valuable: you stop compounding from working against you.

Try it yourself

Frequently asked questions