Compound interest is interest earned not just on your original deposit, but on all the interest that deposit has already earned. That small distinction is the entire reason early, consistent saving outperforms almost any other financial strategy.
A simple side-by-side
Put $10,000 into an account earning 7% annually. With simple interest, you'd earn a flat $700/year, every year — after 20 years, you'd have $24,000. With compound interest (compounded annually), each year's interest gets added to the balance before the next year's interest is calculated. After 20 years, that same $10,000 grows to roughly $38,700 — over $14,000 more, with no additional deposits.
Why the curve bends upward
In year one, $10,000 at 7% earns $700. In year two, you're earning 7% on $10,700, which is $749. That extra $49 seems trivial, but by year 20 your annual interest alone is over $2,500/year — more than a third of your original deposit, earned in a single year.
The Rule of 72
A fast way to estimate doubling time: divide 72 by your interest rate. At 6% annual returns, money doubles roughly every 12 years (72 ÷ 6). At 9%, it doubles in about 8 years. This is why even a 2-3% difference in returns matters enormously over a 30-year investing horizon.
Time matters more than the amount
Consider two investors, both earning 8% annually:
- Investor A invests $5,000/year from age 25 to 35 (10 years, $50,000 total), then stops contributing entirely. By 65: roughly $787,000.
- Investor B invests $5,000/year from age 35 to 65 (30 years, $150,000 total). By 65: roughly $611,000.
Investor A contributed a third as much money but ended up with more, simply by starting 10 years earlier.
Run your own numbers
The real outcome depends on your starting balance, contribution schedule, rate, and time horizon. Use the Compound Interest Calculator to see exactly how your money grows.