How Compound Interest Works
Compound interest means you earn interest not just on your principal, but also on the interest you've already earned. This "interest on interest" effect causes wealth to grow exponentially over time — which is why starting to invest early makes such a huge difference.
A = P × (1 + r/n)^(n×t)
Where A = final amount, P = principal, r = annual interest rate, n = compounding frequency per year, t = time in years.
Frequently Asked Questions
What is the Rule of 72?+
The Rule of 72 is a quick way to estimate how long it takes to double your investment. Simply divide 72 by the annual interest rate. For example, at 8% interest, your money doubles in roughly 72 ÷ 8 = 9 years.
How often should interest compound for best returns?+
The more frequently interest compounds, the more you earn. Daily compounding yields slightly more than monthly, which yields more than annually. The difference becomes more significant with larger amounts and longer time periods.
What's the difference between simple and compound interest?+
Simple interest is calculated only on the principal amount. Compound interest is calculated on the principal PLUS the accumulated interest. Over time, compound interest leads to significantly higher returns.
How do monthly contributions affect growth?+
Monthly contributions dramatically accelerate wealth building. Each contribution is added to your balance and then earns compound interest itself. Small, consistent contributions over decades can result in an enormous final balance.