Compound Interest: How Money Grows on Its Own
Short answer
Compound interest is when interest is calculated not only on the initial amount, but also on the interest already earned. Money grows like a snowball.
Try it yourself
Enter your amount, rate, and time period — and see how compound interest works:
| Year | Simple % | Compound % | Difference |
|---|---|---|---|
| 1 | $11,000 | $11,000 | +$0 |
| 2 | $12,000 | $12,100 | +$100 |
| 3 | $13,000 | $13,310 | +$310 |
| 4 | $14,000 | $14,641 | +$641 |
| 5 | $15,000 | $16,105 | +$1,105 |
| 10 | $20,000 | $25,937 | +$5,937 |
| 15 | $25,000 | $41,772 | +$16,772 |
| 20 | $30,000 | $67,275 | +$37,275 |
Over 20 years compound interest yields $67,275 instead of $30,000 with simple interest — a difference of $37,275.
Why it works
Each year, interest is calculated on the new, already-grown amount. In the first year, 10% of $10,000 = $1,000. In the second year — 10% of $11,000 = $1,100. And so on.
This is exponential growth — barely noticeable at first, then explosive.
The Rule of 72
Divide 72 by the interest rate — and you get the approximate number of years to double your money.
- 10% annual rate → 72 / 10 = 7.2 years to double
- 6% annual rate → 72 / 6 = 12 years to double
Remember
Compound interest is interest on interest. The earlier you start, the more powerful the effect. Time is your greatest ally.