How Compound Interest Works — And Why Starting Early Pays Off

Simple interest earns returns only on your original deposit. Compound interest earns returns on your original deposit plus all the interest you've already accumulated — interest on interest.

Example: $10,000 at 10% for two years. With simple interest, you earn $1,000/year and end with $12,000. With compound interest, year one gives you $11,000, then year two earns 10% on $11,000 — that's $1,100, not $1,000. You end with $12,100. The extra $100 seems trivial, but stretch this to 30 years and the gap becomes enormous.

The most powerful factor in compounding is time, not the interest rate. Consider two investors who each put in $5,000 at 7% annual return:

• Investor A starts at 25 → ~$74,000 at 65 (40 years)
• Investor B starts at 35 → ~$37,000 at 65 (30 years)

Same money, same rate. The 10-year head start roughly doubles the outcome. This is why starting in your 20s matters even if the amounts feel small — time is the irreplaceable ingredient.

Divide 72 by your annual interest rate to find roughly how many years it takes to double your money.

• 6% rate → 72 ÷ 6 = 12 years to double
• 8% rate → 72 ÷ 8 = 9 years to double
• 10% rate → 72 ÷ 10 = 7.2 years to double

It's accurate within a year for rates between 6–12%. Useful for quick mental math when comparing investment options or debt payoff scenarios.

Most savings accounts compound daily; many investments compound monthly. The difference is real but smaller than people expect.

• $10,000 at 10% for 20 years — annual compounding: $67,275
• $10,000 at 10% for 20 years — monthly compounding: $73,281
• $10,000 at 10% for 20 years — daily compounding: $73,890

The gap between monthly and daily is only $609. What matters far more is the rate itself and how long you leave the money growing.

Here's where compound interest gets seriously exciting. Add $200/month to a $10,000 starting balance at 7% for 30 years:

• Starting deposit only: ~$76,000
• With $200/month contributions: ~$296,000