Compound interest explained simply
Compound interest means you earn interest on your interest. Given enough time, that small detail becomes the biggest part of your savings.
With simple interest, you earn interest only on the money you put in. With compound interest, you earn interest on your money and on the interest it has already earned. Each year, the pile you earn on gets bigger.
A quick comparison
Put $10,000 away for 30 years at 7% a year:
- Simple interest: about $31,000
- Compound interest: about $76,000
Same money, same rate. The difference is interest earning interest.
Why starting early matters so much
Say you save $200 a month and earn an average of 7% a year:
- Starting at 25, by 65 you'd have about $525,000.
- Starting at 35, by 65 you'd have about $244,000.
Waiting 10 years means putting in $24,000 less, but ending up with about $280,000 less. Time does most of the work.
The rule of 72
A quick way to estimate how long it takes money to double: divide 72 by the yearly rate. At 6%, money doubles in about 12 years. At 8%, about 9 years.
Compound interest works against you, too
Credit card debt compounds the same way, usually at a much higher rate. That's why paying off high-interest debt is often one of the best "returns" you can get.
Try your own numbers
Our free compound interest calculator shows how your savings could grow with any starting amount, monthly deposit and rate.
Examples use a steady 7% for illustration. Real investment returns go up and down and aren't guaranteed. This is general information, not financial advice.
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Try the Planner freeQuestions people ask
What is compound interest in simple terms?
It's earning interest on both the money you saved and the interest it already earned, so your balance grows faster over time.
How often does interest compound?
It depends on the account. Savings accounts often compound daily or monthly. More frequent compounding grows slightly faster at the same rate.
What is the rule of 72?
Divide 72 by the yearly interest rate to estimate how many years it takes money to double. At 6%, that's about 12 years.
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Steady Sums shares general education, not financial advice. For decisions about your situation, talk to a licensed professional.
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