What is Compound Interest?

Simple interest vs. compound interest

Simple interest pays you only on your original deposit. Put in $1,000 at 10% and you earn $100 every year — forever. Steady, but it never speeds up.

Compound interest pays you on the deposit and on the interest you've already earned. That same $1,000 at 10% earns $100 the first year, then $110 the next (10% of $1,100), then $121, and so on. The yearly gain keeps growing because the base it's calculated on keeps growing.

Over a year or two the difference is small. Over decades it's the difference between a modest sum and a life-changing one.

The Rule of 72

Here's a shortcut you can do in your head. Divide 72 by your yearly rate of return, and you get the rough number of years it takes your money to double.

At 8% a year — roughly the long-run average of the U.S. stock market — your money doubles about every nine years (72 ÷ 8 = 9). So $10,000 becomes $20,000 in nine years, $40,000 in eighteen, and $80,000 in twenty-seven, without you adding a cent.

Why time matters most

Of the three ingredients — money, rate, and time — time is the one with the most leverage, because compounding is exponential. The biggest jumps happen in the final years, when the balance is largest.

That's why starting early beats trying to catch up later. A few extra years at the beginning quietly become the most valuable years of all.