Compound interest is the interest you earn on your original money plus all the interest it has already earned. Because each round of interest gets added to the balance and then earns interest itself, your money grows faster and faster over time — which is exactly why it's the most important idea in saving and investing.
Compound interest vs simple interest
Simple interest only ever pays you on your original deposit. Compound interest pays you on the growing total. Put $1,000 in at 10%:
- Simple: $100 every year, forever — $2,000 after 10 years.
- Compound: $100 in year one, $110 in year two, $121 in year three… about $2,594 after 10 years.
The gap looks small early on and then becomes enormous. That widening curve is the whole point.
The compound interest formula
A = P (1 + r/n)nt
- A — the final amount
- P — the starting principal
- r — annual interest rate as a decimal (8% = 0.08)
- n — how many times interest is added per year (monthly = 12)
- t — number of years
A real example
Invest $10,000 once at 8% compounded yearly and leave it alone:
- After 10 years: about $21,600
- After 20 years: about $46,600
- After 30 years: about $100,600
You added nothing after the first deposit. Time did the work. Try your own numbers in the Compound Interest Calculator.
Why starting early beats saving more
Ravi invests $200/month from age 25 to 35 (10 years, $24,000 total) then stops. Sana invests $200/month from 35 to 65 (30 years, $72,000 total). At 8%, by 65 Ravi often ends up with more than Sana — despite investing a third of the money — because his money had an extra decade to compound. The lesson: the earlier dollar is worth far more than the bigger dollar.
The dark side: compound interest on debt
The same math runs in reverse on credit cards. Unpaid interest is added to your balance and then charged interest. A balance left at 22% can roughly double in under four years if you only pay the minimum. If you carry card debt, attack it first with the Debt Payoff Calculator — no investment reliably beats a guaranteed 22% loss.
Want to see how regular monthly deposits supercharge this? Use the Savings Calculator or the Investment Calculator, and the Rule of 72 to estimate how fast money doubles. The U.S. SEC's investor.gov is a trustworthy ad-free reference.
Try it yourself
Run your own numbers in the free Compound Interest Calculator — instant, private, no sign-up.
Open the Compound Interest Calculator →Frequently asked questions
- What is compound interest in simple words?
- It's interest paid on your original money and on the interest that money has already earned. Each period the interest is added to the balance, so the balance — and the interest it earns — keeps growing.
- What is the formula for compound interest?
- A = P(1 + r/n)^(nt), where P is the starting amount, r is the yearly rate as a decimal, n is how many times per year interest is added, and t is the number of years.
- Is compound interest good or bad?
- Both. It builds wealth powerfully when you save or invest, and works against you on debt like credit cards, where unpaid interest is charged more interest.
- How often should interest compound?
- More frequent compounding (daily or monthly) grows money slightly faster than yearly, but the rate, the amount and especially the time invested matter far more than the compounding frequency.
Related guides
How much to save per month to reach your goal: formula, examples, and shortcut · How to build a 6-month emergency fund: the complete step-by-step plan · How to calculate CD interest: APY, the formula, and what banks rarely tell you · How to Build a CD Ladder: Strategy, Steps, and a $25,000 Example