What is compound interest?
In one line: Compound interest is when growth is added to your balance, so the next round of growth is worked out on a bigger amount.
A simple example
You put $1,000 somewhere that grows 7% a year, and you leave the growth in.
| Year | Start | Growth (7%) | End |
|---|---|---|---|
| 1 | $1,000.00 | $70.00 | $1,070.00 |
| 2 | $1,070.00 | $74.90 | $1,144.90 |
| 3 | $1,144.90 | $80.14 | $1,225.04 |
Each year's growth is a little bigger, because it's worked out on a bigger balance. After 10 years: about $1,967.
With simple interest (7% of the first $1,000 only, every year), you'd have $1,700. The extra $267 is the compounding. A math example, not a promise. Real investments don't grow in a straight line.
The rule of 72
A quick way to guess doubling time: divide 72 by the yearly rate.
72 ÷ 7 ≈ 10.3 years to double. At 4%, about 18 years. The doubling time calculator does it exactly.
Why it matters
Time does a lot of the work. Starting earlier, even with small amounts, gives growth more rounds to build on. Try your own numbers in the compound interest calculator.
It works against you too. Debt on a credit card compounds the same way, often at a high rate.
A common mistake
Forgetting fees and inflation. A 1% yearly fee comes out of every round of growth, so it compounds too. And if prices rise 3% a year, a 7% gain buys only about 4% more. See the inflation calculator.
Compounding also works on losses. A 50% drop needs a 100% gain to get back. That's why keeping losses small matters so much in trading.
Questions
How often is interest compounded?
It depends. Savings accounts often compound daily or monthly. Investment returns are usually shown yearly. More frequent compounding adds a little more.
Is compound interest the same as compound returns?
Close. Interest is a fixed rate, like a savings account. Returns from stocks or funds go up and down, but reinvesting them compounds the same way.
What is the formula for compound interest?
Final amount = starting amount × (1 + rate) ^ years. For $1,000 at 7% for 10 years: 1,000 × 1.07^10 ≈ $1,967.
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