Compound Interest: The Simple Idea That Builds Wealth
How compounding works, the Rule of 72, and why starting early beats starting big — with interactive examples.
Key takeaways
- Compound interest earns returns on your past returns, not just your deposits.
- The Rule of 72: 72 ÷ annual rate ≈ years to double.
- Time is the strongest variable — start early, even with small amounts.
- Compounding works against you on debt, which is why high-APR balances grow so fast.
Simple vs compound interest
With simple interest, you earn only on the original amount. 1,000 at 10% earns 100 every year — 2,000 after ten years. With compound interest, each year's interest is added to the balance and earns interest itself. 1,000 at 10% compounded annually becomes about 2,594 after ten years. The extra 594 is interest earned on interest.
The formula
Future value = P × (1 + r/n)n×t, where P is the starting amount, r the annual rate, n the number of compounding periods per year, and t the number of years. Regular contributions add their own compounding streams on top. Our compound interest calculator handles both.
The Rule of 72
Divide 72 by the annual rate to estimate how long money takes to double. At 6%: about 12 years. At 9%: about 8 years. At 12%: about 6 years. It works in reverse for inflation — at 3% inflation, prices double in about 24 years.
The three levers
- Time — the exponent in the formula, and the most powerful lever.
- Rate — higher returns compound faster but usually come with more risk. Fees reduce your effective rate.
- Contributions — regular additions give compounding more raw material.
Compounding in reverse: debt
A credit card at 24% APR compounds against you. An unpaid 5,000 balance can grow past 6,000 within a year. That's why paying off high-interest debt is often the best "investment" available: a guaranteed, tax-free return equal to the interest rate.
Put it to work
- Automate a monthly investment, however small, and increase it each year (a "step-up").
- Reinvest dividends and interest instead of withdrawing them.
- Choose low-fee investments so more of the return compounds for you.
- Leave long-term money untouched — interruptions reset the curve.
Watch: the 5-minute version
FAQ
How often should interest compound?
More frequent compounding helps slightly, but the difference between monthly and daily is small. The rate and time invested matter far more.
What's a realistic return to assume?
Savings accounts track short-term interest rates. Diversified stock portfolios have historically averaged higher long-run returns with significant year-to-year swings. Use conservative assumptions for planning.
Does inflation cancel compounding?
It reduces real (after-inflation) growth. Subtract expected inflation from your return to estimate real purchasing-power growth.
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This guide is general education, not personal financial, tax or legal advice. Rules, rates and limits vary by country and change over time — confirm with official sources or a licensed professional.