FINANCE9 min read

Compound Interest Explained: How to Build Wealth (Calculator & Examples)

Albert Einstein reportedly called compound interest the "eighth wonder of the world". Understanding it is essential to building long-term wealth. Here's everything you need to know.

Calculate Compound Interest Now

Table of Contents

Quick Answer

Compound interest is interest calculated on both the initial principal AND the accumulated interest from previous periods. Unlike simple interest, your money grows exponentially because you earn "interest on interest."

This is why a $10,000 investment at 7% annual interest becomes over $76,000 in 30 years – without adding another cent. The magic is in letting your earnings generate their own earnings.

The Compound Interest Formula

A = P(1 + r/n)nt
A = Final amount (principal + interest)
P = Principal (initial investment)
r = Annual interest rate (decimal)
n = Compounding frequency per year
t = Time in years

Compound vs. Simple Interest

YearSimple Interest (5%)Compound Interest (5%)Difference
Year 1$10,500$10,500+$0
Year 5$12,500$12,763+$263
Year 10$15,000$16,289+$1,289
Year 20$20,000$26,533+$6,533
Year 30$25,000$43,219+$18,219

Starting with $10,000 principal. Compound interest compounded annually.

The Rule of 72: Quick Mental Math

Years to Double = 72 ÷ Interest Rate

This simple formula tells you roughly how long it takes to double your money.

4%
≈ 18 years to double
6%
≈ 12 years to double
8%
≈ 9 years to double
10%
≈ 7.2 years to double
12%
≈ 6 years to double

Why Starting Early Matters (The $1 Million Difference)

The most powerful factor in compound interest is time. Here's a dramatic example:

Early Starter (Age 25)
Invests $5,000/year for 10 years, then stops
Total invested: $50,000
Value at 65: $602,070
Late Starter (Age 35)
Invests $5,000/year for 30 years straight
Total invested: $150,000
Value at 65: $540,741

Assuming 7% annual return. The early starter invested 1/3 the money but ended up with MORE.

Frequently Asked Questions

What is compound interest in simple terms?

Compound interest is when you earn interest on your interest. Instead of only earning on your original investment, you also earn on all the interest you've already accumulated.

How often should interest be compounded?

More frequent compounding = more growth. Daily compounding earns slightly more than monthly, which earns more than annually. However, the difference becomes smaller as frequency increases.

Is compound interest good or bad?

It depends on which side you're on. Compound interest is GOOD when you're saving/investing (your money grows faster). It's BAD when you're borrowing (debt grows faster, especially credit cards).

What is a good compound interest rate?

Historically, the stock market returns about 7-10% annually on average. High-yield savings accounts offer 4-5% (2024). Higher returns usually come with higher risk.

How do I calculate compound interest manually?

Use the formula A = P(1 + r/n)^(nt). Or use our free calculator for instant results with any principal, rate, and time period.

See Your Money Grow

Calculate exactly how much your investments will be worth with our free compound interest calculator.

Free Compound Interest Calculator