How Compound Interest Works
Compound interest is interest calculated on your initial principal and on the accumulated interest from previous periods. Unlike simple interest, which only grows on the original amount, compound interest lets your money "earn interest on interest" — which is why Albert Einstein reportedly called it the eighth wonder of the world.
The Compound Interest Formula
The standard formula is:
A = P (1 + r/n)nt
- A — the final amount
- P — the principal (initial amount)
- r — annual interest rate (as a decimal)
- n — number of times interest compounds per year
- t — number of years
When you also add a regular monthly contribution, each deposit earns its own compound interest for the remaining time — which dramatically increases your final balance.
Why Compounding Frequency Matters
The more often interest compounds, the more you earn. Daily compounding produces a slightly higher return than monthly, which in turn beats annual compounding — all from the same interest rate. Try switching the frequency above to see the difference.
The Rule of 72
Want a quick estimate of how long it takes to double your money? Divide 72 by your annual rate. At 8%, your money doubles in about 9 years (72 ÷ 8). At 12%, it takes roughly 6 years.
Frequently Asked Questions
Is compound interest better than simple interest?
For savers and investors, yes — compound interest grows your balance faster because interest is added back and earns more interest. For borrowers, it means debt can grow faster too.
How can I make compounding work harder for me?
Start early, stay invested for longer, add regular contributions, and choose accounts that compound more frequently. Time is the most powerful factor in compounding.