What Is Compound Interest?
Compound interest is interest calculated on the initial principal and also on the accumulated interest from previous periods. It's what makes your investments grow exponentially over time.
"Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it." — Albert Einstein
How It Works
When you invest money, you earn interest on your principal. With compound interest, you then earn interest on both your principal and the interest you've already earned.
The Formula
The basic compound interest formula is:
A = P(1 + r/n)^(nt)
Where:
- A = final amount
- P = principal (initial investment)
- r = annual interest rate (decimal)
- n = number of times interest compounds per year
- t = number of years
A Simple Example
Imagine you invest $10,000 at a 7% annual rate, compounded monthly, for 20 years:
- After 5 years: $14,176
- After 10 years: $20,097
- After 20 years: $40,387
Your money quadrupled without you adding a single dollar! That's the power of compound interest.
The Rule of 72
A quick way to estimate how long it takes to double your money: divide 72 by the interest rate.
At 8% annual return: 72 / 8 = 9 years to double.
Try It Yourself
Use our Compound Interest Calculator to see how your investments could grow over time.