What Is Compound Interest? Simple Explanation With Examples
Compound interest means earning interest on your interest — not just your original deposit. It's why small investments grow into large sums, and why credit card debt grows so fast.
Simple vs. Compound
Simple interest earns only on the principal. $1,000 at 10% simple = $100/year, always.
Compound interest earns on principal plus all previous interest. Year 2: you earn 10% on $1,100 not $1,000. Small difference that snowballs dramatically.
$1,000 at 10% — Simple vs. Compound
| Year | Simple Interest | Compound Interest |
|---|---|---|
| 1 | $1,100 | $1,100 |
| 5 | $1,500 | $1,611 |
| 10 | $2,000 | $2,594 |
| 20 | $3,000 | $6,727 |
| 30 | $4,000 | $17,449 |
| 40 | $5,000 | $45,259 |
Compound Interest Works Against You Too
Credit cards charge 18-29% compounded daily. A $3,000 balance at 24% APR with no payments grows to over $15,000 in 7 years.
Two Rules to Remember
- Start early. $5,000 at age 25 at 7% = ~$75,000 at 65. Same amount at 45 = only ~$19,000.
- Never carry credit card debt. Pay balances in full every month.
See exactly how your savings grow over time.
Compound Interest Calculator →