Compound interest is often called the eighth wonder of the world. It's the reason a small investment can grow into a large one — if you give it enough time.
What is compound interest?
Compound interest is interest earned on both your original money and the interest you've already accumulated. Unlike simple interest (which only pays on the principal), compounding makes your money grow at an accelerating rate.
The compound interest formula
The formula for compound interest is:
A = P(1 + r/n)nt
- A = the future value of the investment
- P = the principal (initial amount)
- r = the annual interest rate (decimal)
- n = the number of times interest compounds per year
- t = the number of years
Real example
Suppose you invest $10,000 at a 7% annual return, compounded monthly, and add $500 each month for 20 years.
| Year | Contributions | Interest | End Balance |
|---|---|---|---|
| 5 | $40,000 | $8,400 | $48,400 |
| 10 | $70,000 | $27,500 | $97,500 |
| 15 | $100,000 | $67,000 | $167,000 |
| 20 | $130,000 | $144,000 | $274,000 |
Notice how the interest grows faster than your contributions. That's compounding at work.
Why starting early matters
Two investors, Alice and Bob, both retire with the same amount. Alice starts at 25 with $200/month. Bob waits until 35 but invests $400/month. Because Alice's money compounds for 10 extra years, she ends up with more — even though she invested half as much per month.
Compound frequency
The more often interest compounds, the faster your money grows. Daily compounding beats monthly, which beats annual. The difference is small over a few years but significant over decades.
Calculate your own growth with our free compound interest calculator.
Explore the AI Agent Monetization Starter Kit — one-time purchaseKey takeaways
- Compound interest accelerates growth over time
- Time in the market beats timing the market
- Consistent contributions + compounding = wealth
- Use a calculator to model your own scenario