How compound interest works
Compound interest is interest earned on interest. Your balance grows by the rate compounded each period: FV = P × (1 + r/n)^(n×t), where P is the initial deposit, r the annual rate, n the compounding periods per year and t the number of years. The more often interest compounds, the more the effective rate exceeds the nominal rate.
Time is the biggest factor. At 5% compounded monthly, $10,000 grows to about $16,470 in 10 years — and to $27,126 in 20 years, even without adding a dollar. Small differences in rate or compounding frequency matter far more over decades than most people expect.
Compound interest quick facts
- Rule of 72: 72 ÷ rate ≈ years to double (5% → ~14 years)
- Monthly compounding is standard for savings accounts
- Starting earlier beats saving more — the last years contribute the most