The Compound Interest Formula
A = P × (1 + r/n)^(n×t)
Where: P = Principal | r = Annual rate | n = Compounds per year | t = Years
Don't let the formula intimidate you. In practice: if you invest $5,000 at 7% annually for 20 years, compounding monthly: A = $5,000 × (1 + 0.07/12)^(12×20) = $20,097. Your money quadrupled without adding a single dollar.
$100/Month Growth Over Time
| Years | Total Invested | At 5% | At 7% | At 10% |
|---|---|---|---|---|
| 10 yrs | $12,000 | $15,528 | $17,308 | $20,484 |
| 20 yrs | $24,000 | $41,103 | $52,397 | $75,937 |
| 30 yrs | $36,000 | $83,226 | $121,997 | $226,048 |
| 40 yrs | $48,000 | $152,602 | $262,481 | $637,678 |
Assumes monthly contributions, compounded monthly.
The Rule of 72 — Quick Mental Math
Divide 72 by your interest rate to find how many years it takes to double your money:
4%
18 years to double
6%
12 years to double
8%
9 years to double
12%
6 years to double
Frequently Asked Questions
What is compound interest in simple terms?
Compound interest means you earn interest on your interest. If you invest $1,000 at 7% annually, after year 1 you have $1,070. In year 2, you earn 7% on $1,070 — not just $1,000. Over decades, this snowball effect is dramatic.
How often does compound interest compound?
It depends on the account. Savings accounts typically compound daily or monthly. CDs compound monthly or quarterly. The more frequently it compounds, the more you earn.
What is the Rule of 72?
Divide 72 by your annual interest rate to estimate how many years it takes to double your money. At 6% interest: 72 ÷ 6 = 12 years to double. At 9%: 8 years.
Is compound interest good or bad?
It's great when you're investing (your money grows faster). It's bad when you're borrowing — credit card debt compounds daily, which is why balances grow so fast.
How much should a beginner invest to see compound interest work?
Even $50/month invested at 8% annual return grows to over $150,000 in 40 years. Starting early matters far more than the amount. Time is the most powerful variable.