Compound Interest Explained: How Your Money Grows Over Time

Compound interest means earning interest on your interest. In the first few years it looks unimpressive; over decades it's the main reason patient savers end up with far more than they put in.

Simple vs compound interest

Simple interest is paid only on the original amount.

Compound interest is added to the balance, so the next period's interest is calculated on a bigger number.

Example: 100,000 at 10% a year for 20 years.

	Simple interest	Compound interest (yearly)
After 1 year	110,000	110,000
After 5 years	150,000	161,051
After 10 years	200,000	259,374
After 20 years	300,000	672,750

After 20 years, compounding produces more than twice as much.

The formula

A = P × (1 + r ÷ n)^(n × t)

• A: the final amount
• P: the starting amount
• r: the annual rate as a decimal (10% = 0.10)
• n: how many times a year interest is added
• t: the number of years

Compounding frequency

Interest can be added yearly, quarterly, monthly or even daily. More frequent compounding earns slightly more. For 100,000 at 10% for 10 years:

Compounding	Final amount
Yearly	259,374
Quarterly	268,506
Monthly	270,704
Daily	271,791

That's why banks quote an APY or effective annual rate: it shows what you really earn after compounding.

The rule of 72

To estimate how long money takes to double, divide 72 by the interest rate:

• At 6%: 72 ÷ 6 = about 12 years
• At 9%: about 8 years
• At 12%: about 6 years

Time matters more than amount

Someone who invests 5,000 a month from age 25 to 35 and then stops will often end up with more at 60 than someone who invests the same 5,000 a month from 35 to 60, because the early money has longer to compound. Starting early beats starting big.

The other side: debt

Compounding works against you on credit cards and loans. Unpaid credit card balances compound monthly at high rates, which is why balances can grow faster than people expect. Paying off high-interest debt is effectively a guaranteed return.

Don't forget inflation

If your savings earn 8% while prices rise 6%, your real growth is only about 2% a year. Compare returns with the inflation calculator in mind.

Try the numbers

The compound interest calculator shows growth with any compounding frequency and regular monthly deposits. Compare with the simple interest calculator, or see fixed deposit maturity values with the FD calculator.