Compound interest is interest earned on both your original principal and the interest that has already accumulated. Over long periods, that feedback loop is what turns steady saving into substantial wealth.
Albert Einstein reportedly called compound interest the eighth wonder of the world. Whether or not he said it, the math is real: small differences in rate or time produce large differences in outcomes.
Simple vs. compound growth
Simple interest is calculated only on the principal. $10,000 at 5% simple interest earns $500 every year — flat.
Compound interest reinvests each period's earnings. $10,000 at 5% compounded annually earns $500 the first year, $525 the second (5% on $10,500), and so on. The gap widens every year.
Compounding frequency matters: monthly compounding grows slightly faster than annual at the same stated rate because interest is calculated more often.
Regular contributions amplify compounding
Most real-world wealth building combines compound returns with recurring deposits — paycheck 401(k) contributions, IRA transfers, or taxable brokerage deposits.
Contributions made early in the timeline have more time to compound. A dollar invested at 25 can be worth several times a dollar invested at 45, even with identical returns.
Missing years of contributions — or pausing during market downturns — reduces the base that future compounding acts on. Consistency often beats timing.
The Rule of 72
Divide 72 by your annual return rate to estimate how many years it takes to double your money. At 7% average return, doubling takes roughly 72 ÷ 7 ≈ 10 years.
The rule is an approximation, not a guarantee. Actual markets are volatile year to year. Use it for intuition, not precise planning.
Inflation and realistic returns
Nominal returns (headline percentages) do not account for inflation. A 7% return with 3% inflation is roughly 4% real growth in purchasing power.
Historical U.S. stock market returns average roughly 7–10% nominal before inflation over very long periods, but with deep drawdowns along the way. Bonds and cash earn less but fluctuate less.
When projecting retirement or FIRE timelines, use conservative return assumptions and stress-test lower rates. Sequence-of-returns risk near retirement can matter as much as average return.
Project your growth
Plug in starting balance, monthly contribution, expected return, and time horizon to see how compounding shapes your outcome.
Use the compound interest calculator for a focused view, or the investment growth calculator for portfolio-style projections with multiple inputs.