Finance · 4 min read

Compound Interest, Explained Simply

How compound interest works, why starting early matters so much, and how regular contributions accelerate growth.

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Compound interest is interest earned on your interest. With simple interest you only earn on the original amount; with compound interest each period's gain is added to the balance, so the next period earns a little more. Over years, that snowball effect becomes the main driver of growth.

The formula

A = P · (1 + r/n)^(n·t), where P is the starting amount, r is the annual rate (as a decimal), n is how many times a year it compounds, and t is the number of years.

Compounding more often (monthly vs annually) helps a little, but the two things that matter most are the rate and the time.

Why starting early wins

Because growth builds on itself, an extra decade at the start is worth far more than extra money at the end. Someone who invests modestly in their twenties can end up ahead of someone who invests much more starting in their forties — time does the heavy lifting.

Regular contributions

Adding a fixed amount every month keeps the balance growing even when returns are flat, and each contribution then compounds for the rest of the period. This is why automatic monthly investing is so effective.

Rule of 72: divide 72 by the annual return to estimate how many years it takes your money to double. At 8%, that's about 9 years.
  1. 1Enter your starting amount, annual rate, years and monthly contribution.
  2. 2Compare the future value with the total you actually put in — the gap is compound interest.
  3. 3Increase the years to see how much difference time makes.

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