Compound Interest Explained (and Why Starting Early Wins)

How compound interest works, the rule of 72, and a simple example showing why time matters most.

Compound interest means you earn interest on your interest. Each period, your growth is added to your balance, and the next period's growth is calculated on the bigger total. Over many years this snowball effect becomes powerful.

A simple example

Put $5,000 in an account and add $300 a month. At 6% a year, after 20 years you would have about $155,000. You contributed $77,000, and interest added about $78,000. Run your own numbers in the compound interest calculator.

Why starting early matters

Time does most of the work. Someone who invests $300 a month from age 25 will usually end up with far more at 65 than someone who invests $600 a month from age 40, even though the second person puts in more total money.

The rule of 72

Divide 72 by the annual return to estimate how many years it takes to double your money. At 6% it is about 12 years. At 9% it is about 8 years.

Compounding works against you too

Credit card debt compounds at high rates. A balance at 22% roughly doubles in about 3.5 years if unpaid. That is why paying off high-interest debt is a guaranteed return.

Don't forget inflation and fees

Prices rise over time, so growth should be compared with inflation. See the inflation calculator. Fees also compound: a 1% annual fee can cost tens of thousands over decades. For long-term planning, try the retirement savings calculator.

This article is general education, not financial advice.