See how your money grows over time with the power of compound interest. The 8th wonder of the world.
Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. Albert Einstein reportedly called it "the eighth wonder of the world," saying "he who understands it, earns it; he who doesn't, pays it." The key distinction from simple interest is that with compounding, your interest earns interest — creating exponential rather than linear growth.
The formula is: A = P(1 + r/n)^(nt), where A is the final amount, P is the principal, r is the annual interest rate, n is the number of times interest compounds per year, and t is the time in years. The more frequently interest compounds, the faster your money grows — though the difference between monthly and daily compounding is relatively small in practice.
The Rule of 72 is a quick mental shortcut for estimating how long it takes to double your money. Simply divide 72 by the annual interest rate. At 7% annual return, your money doubles in approximately 72 ÷ 7 = 10.3 years. At 10%, it doubles in 7.2 years. At 3% (a typical savings account), it takes 24 years to double.
| Return Rate | 10 Years | 20 Years | 30 Years |
|---|---|---|---|
| 2% (savings account) | $12,190 | $14,859 | $18,114 |
| 5% (bonds) | $16,289 | $26,533 | $43,219 |
| 7% (index fund avg) | $19,672 | $38,697 | $76,123 |
| 10% (S&P 500 hist.) | $25,937 | $67,275 | $174,494 |
| 15% (growth stocks) | $40,456 | $163,665 | $662,118 |
The same force that builds wealth through investing destroys it through debt. Credit card interest at 20–25% APR compounds monthly, meaning a $5,000 balance that you only make minimum payments on can take 15+ years to pay off and cost over $10,000 in interest. Understanding compound interest is equally important for avoiding debt traps as it is for building investments.