Compound interest — called by Einstein the "eighth wonder of the world". Its core idea is simple: interest earns interest too. Let's fully understand compound interest and how to use it to build your financial future.
What Is Compound Interest?
The difference between compound and simple interest: simple interest only pays on the original principal; compound interest adds each period's interest back into the principal, so the next period earns on principal + accumulated interest.
Formula: A = P × (1 + r/n)nt — where A = final amount, P = principal, r = annual rate (decimal), n = compounding periods per year, t = years.
The Rule of 72: Quick Doubling Estimates
Want to know how long it takes your money to double? Divide 72 by the annual return:
- 6% annual → 72 ÷ 6 = 12 years to double
- 8% annual → 72 ÷ 8 = 9 years to double
- 10% annual → 72 ÷ 10 = 7.2 years to double
Monthly Investing: What Can 20 Years Do?
Invest $200/month at an 8% annualized return starting at 25, and by 60 you'd have roughly $588,000. Start at 35 instead and you'd end with about $244,000 — a gap of ~$344,000, purely from starting ten years earlier. Model it yourself with the compound interest calculator.
Compound Interest Works Against You in Loans
The same compounding that grows investments also grows debt. On a loan, unpaid interest capitalizes, which is why long terms and high rates compound into enormous total interest. Use the mortgage calculator to see how total interest explodes with term length.
Three Rules for Using Compound Interest Well
- Start early: time is compound interest's best friend
- Stay consistent: regular automated investing beats lump sums in consistency
- Control fees: a 1% higher annual fee can cost hundreds of thousands over 30 years
Run your numbers through the compound interest calculator today and see what compounding can create for you.