Compound interest means you earn interest on your money and on the interest you have already earned. That is why savings can grow faster and faster over time.
A simple example
You put in $10,000 at 5% a year, added once a year, and leave it for 10 years.
| Year | Balance |
|---|---|
| 1 | $10,500 |
| 5 | $12,763 |
| 10 | $16,289 |
Without compounding, 5% of $10,000 is $500 a year, so you would have $15,000. Compounding gives you $1,289 more.
Adding money each month
Saving $100 a month at 6% for 10 years puts in $12,000 and ends at about $16,388. The extra $4,388 is interest. Try your own numbers in the compound interest calculator.
Why starting early matters
Money you save early has more years to grow. Take $300 a month at 6% for 20 years. Waiting 5 years to start leaves you with about 37% less, even though you only skip a quarter of the time. The calculator shows the exact difference for your numbers.
The rule of 72
Divide 72 by the yearly rate to guess how many years it takes to double. At 6%, about 12 years. At 8%, about 9 years.
What compounding does not include
- Inflation. A balance that grows 5% when prices rise 3% only gains about 2% in buying power.
- Tax and fees. These reduce what you keep. Check the fees on any account or fund.
- Ups and downs. Stocks do not return the same amount each year. The calculator uses one steady rate.
How often it compounds
Daily, monthly or yearly compounding all give similar results. The rate you earn matters much more than how often it is added.
This is general information, not financial advice. See also how to save for a goal.
Compound interest calculator Try your own numbers and see your balance grow.Sources
- Background reading, Investor.gov: Compound interest
- Background reading, Investor.gov: Compound interest calculator
This article is for education and is not financial, tax or legal advice. Figures are checked against the sources above and may change. Read the full disclaimer.