How Compound Interest Works (With Examples)
Compound interest earns returns on both your principal and previous interest. Over time this creates exponential growth — here's the formula and examples.
Simple vs. Compound
Simple interest earns only on the principal. Compound interest earns on principal plus all previous interest.
$1,000 at 10% simple for 5 years = $1,500. The same amount compounded annually = $1,610.51.
The Formula
A = P × (1 + r/n)^(n×t)
A = final amount, P = principal, r = annual rate (decimal), n = times compounded per year, t = years.
Example: $5,000 at 7% compounded monthly for 10 years = $9,966.66
The Rule of 72
Divide 72 by your annual rate to estimate years to double your money.
At 6%: 72 ÷ 6 = 12 years. At 9%: 8 years. At 12%: 6 years.
$10,000 at 7% over time
| Years | Value | Growth |
|---|---|---|
| 5 | $14,025 | 40% |
| 10 | $19,672 | 97% |
| 20 | $38,697 | 287% |
| 30 | $76,123 | 661% |
See exactly how your money grows with our free compound interest calculator.
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