Compound interest means you earn interest on your original money and on the interest it has already earned. Over short periods it looks similar to simple interest. Over decades it becomes the main driver of growth. The same effect works against you on debt that you do not pay down.
Simple versus compound interest
Here is $5,000 at 6% per year. Simple interest pays 6% of the original $5,000 each year. Compound interest pays 6% of the growing balance.
| Time | Simple interest | Compound interest | Extra from compounding |
|---|---|---|---|
| 10 years | $8,000 | $8,954 | $954 |
| 20 years | $11,000 | $16,036 | $5,036 |
| 30 years | $14,000 | $28,717 | $14,717 |
Adding $200 a month
Regular contributions amplify the effect. This table assumes 6% a year compounded monthly. Real investment returns vary and are never guaranteed.
| Time | You contributed | Balance | Growth earned |
|---|---|---|---|
| 10 years | $24,000 | $32,776 | $8,776 |
| 20 years | $48,000 | $92,408 | $44,408 |
| 30 years | $72,000 | $200,903 | $128,903 |
| 40 years | $96,000 | $398,298 | $302,298 |
Why starting early helps
Compare two savers at an assumed 7% yearly return. One invests $200 a month from age 25 to 35 (10 years, $24,000 total) and then stops contributing. Another waits until 35 and invests $200 a month for 30 years until 65 ($72,000 total). At 65, the early saver has about $139,809 from $24,000 contributed (about 5.8 times the money put in). The later saver has about $243,994 from $72,000 contributed (about 3.4 times). The later saver still ends up with more because they contributed three times as much, but waiting ten years meant tripling the contributions to reach about 1.7 times the early saver's result. The early dollars simply had 30 more years to grow. This is a simplified illustration that ignores taxes, fees and market swings.
Compounding works against debt too
A credit card balance that grows at a high APR compounds against you. Paying only the minimum can stretch repayment for years. Our minimum payments guide shows how.
Try it yourself
Enter your own starting amount, monthly contribution, rate and time in the Compound Interest Calculator. For a quick shortcut estimate of doubling time, see the Rule of 72 guide.
Try the Compound Interest Calculator
Common questions
What is compound interest in simple words?
Interest earned on both your original money and the interest that was previously added.
How is compound interest different from simple interest?
Simple interest is calculated only on the original amount. Compound interest is calculated on the growing balance, so it accelerates over time.
Is compound interest guaranteed on investments?
No. Savings accounts pay stated rates, but investment returns vary. The examples use constant assumed rates for illustration only.
Does compound interest apply to debt?
Yes. Unpaid interest on loans and credit cards can compound, which is why paying more than the minimum matters.