Compound Interest Explained: How Money Grows Over Time
Compound interest means you earn returns on your original money and on the returns you have already earned. Over long periods, this snowballing effect becomes the main driver of growth.
A simple example
If you invest $10,000 and earn 7% a year with no further contributions, it grows to about $14,000 after 5 years, about $19,700 after 10 years and about $76,100 after 30 years. The growth in the last decade is far larger than in the first, because the balance being compounded is larger.
The rule of 72
A quick mental shortcut is to divide 72 by the annual return to estimate how many years it takes to double. At 7%, money doubles roughly every 10 years. At 4%, it takes about 18.
Time beats timing
Starting early often matters more than investing larger amounts later, because early dollars have more years to compound. Regular monthly contributions add to this effect, since each new contribution begins compounding too.
Look at returns after inflation
The $76,100 above is in future dollars. With 2.5% annual inflation, it would buy about what $36,300 buys today. Looking at the inflation-adjusted figure gives you a more realistic picture when you plan for goals like retirement.
Fees and taxes reduce growth
Investment fees come out of your return every year and compound against you. A seemingly small annual fee can reduce your final balance significantly over decades, so compare costs when choosing funds.
Returns are never guaranteed, and real markets rise and fall. Our compound interest calculator lets you test different returns, contribution amounts and time periods.