How Compound Interest Works

Compound interest is interest paid on interest. Your money earns a return, and that return starts earning too.

That is the whole idea. Everything else is detail.

A simple example

Put $1,000 in an account paying 10% a year. After year one you have $1,100.

In year two you earn 10% of $1,100, which is $110. Now you have $1,210.

Year three pays $121 and year ten pays $236. The payments keep growing because the base keeps growing.

After 25 years the $1,000 has become $10,835. You never added a cent.

In the early years the interest is small and the line looks almost flat. People give up here.

Later the interest payments are bigger than your original deposit. The line turns sharply upward.

This is why long holding periods matter so much. Most of the growth arrives at the end.

Rate, time and contributions drive the result. Time is the one you control most.

Rate is set by the market or your bank. Contributions are limited by your income.

But starting five years earlier costs nothing. It can add more than any realistic rate improvement.

Savings accounts and CDs compound daily or monthly. The interest is paid in cash and added to the balance.

Stocks and funds compound differently. Gains stay invested and dividends can be reinvested.

Either way the effect is the same. Returns on returns.

Debt compounds against you. A credit card charges interest on last month's unpaid interest.

The same math that builds wealth builds debt. Paying off high rate debt is the best guaranteed return most people can get.

Use the compound interest calculator and change one input at a time. Watch what happens when you add ten years.