Compound Interest Explained: How Your Money Grows
Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods. It's the most powerful force in finance.
The formula: A = P(1 + r/n)^(nt), where A = final amount, P = principal, r = annual rate, n = compounds per year, t = years.
Example: $10,000 invested at 7% annual rate, compounded monthly, for 10 years: A = 10000(1 + 0.07/12)^(12×10) = $20,096. Interest earned = $10,096.
The power of compounding: Doubling the time more than doubles the result. At 7%, $10,000 becomes $19,672 in 10 years, $38,697 in 20 years, and $76,123 in 30 years.
Rule of 72: To estimate how long it takes to double your money, divide 72 by the interest rate. At 7%: 72/7 ≈ 10.3 years. At 10%: 72/10 = 7.2 years.
Use our Compound Interest Calculator in the Finance category to experiment with different principal, rates, and time periods.