How Compound Interest Really Works (Simple Explanation)

Compound interest is one of the most powerful forces in personal finance. It allows your money to grow not only on the original amount you invested, but also on the interest that accumulates over time.

You can test how compound growth affects your investments using our Investment Calculator . Adjust your contributions and return rate to see how your money scales over the years.

What Is Compound Interest?

Compound interest means earning interest on your interest. Instead of only earning returns on the amount you originally deposited, you also earn returns on the growth that has already happened.

Example:

If you invest $10,000 and it grows by 8% per year, you earn $800 in the first year. In year two, your 8% return is based on $10,800, not just the original $10,000. Over many years, this effect becomes dramatic.

Why Small Contributions Matter

Regular monthly contributions, even small ones, accelerate compound growth. That’s because each contribution has years to grow and earn additional returns. The earlier you start, the more powerful the compounding effect becomes.

Try entering different monthly contribution amounts into the Investment Calculator to see how even an extra $50–$200 per month changes your long-term results.

The Compound Interest Formula

The general formula for compound interest is:

A = P(1 + r/n)^(nt)

Where:

P = initial principal
r = annual interest rate
n = number of compounding periods per year
t = years invested

Luckily, you don’t need to do the math yourself—our Investment Calculator will compute everything instantly.

Long-Term Growth Example

Let’s compare two investors:

Investor A: Invests $200 per month starting at age 25
Investor B: Invests the same amount but starts at 35

Assuming a 7% return, Investor A could retire with nearly $250,000 more simply because they started earlier.

That’s the power of compounding—and why starting today matters more than how much you start with.

Try It Yourself

Open the Investment Calculator and enter a starting amount, monthly contribution, and expected return. Watch how your investment grows each year.

Compound interest rewards consistency—and your future self will thank you.