Understanding Compound Interest

Compound interest is one of the most powerful concepts in personal finance. It is the reason why small, consistent savings can grow into substantial sums over time, and why debt can spiral out of control if left unchecked.

Simple vs. Compound Interest

Simple interest is calculated only on the original principal. Compound interest is calculated on the principal plus any previously accumulated interest. The difference seems small over three years. Over thirty years, it is enormous.

Use our Compound Interest Calculator to see how different rates and time periods affect your returns.

The Rule of 72

Divide 72 by your annual interest rate to estimate how many years it takes your money to double. At 6% interest, your money doubles in about 12 years. At 9%, it doubles in about 8 years.

Compound Interest and Debt

Compound interest works against you when you owe money. Credit card debt at 18% interest can cost you thousands more than the original amount. Use our Loan Calculator to see exactly how much interest you will pay.

Starting Early

The single most important factor in benefiting from compound interest is time. Someone who starts investing $200 per month at age 25 at a 7% average return will have roughly $525,000 by age 65. Someone who starts at age 35 will have about $244,000. That is a difference of over $280,000, even though the second person only invested $24,000 less.