Compound Interest Explained: How Your Money Grows Money

Albert Einstein supposedly called compound interest the eighth wonder of the world. Whether he actually said it is debatable, but the math isn't: compound interest is the reason a 25-year-old investing $200/month retires wealthier than a 35-year-old investing $400/month.

Simple interest vs compound interest

Simple interest pays you only on your original deposit. Put $1,000 in a 5% simple interest account and you earn $50/year, every year, forever. After 10 years: $1,500.

Compound interest pays you on your deposit plus all previous interest. Same $1,000 at 5% compounded annually: year one you earn $50 (on $1,000), year two you earn $52.50 (on $1,050), year three $55.13 (on $1,102.50). After 10 years: $1,629. After 30 years: $4,322. The curve accelerates because each year's interest earns its own interest.

The rule of 72

Want to know how long it takes to double your money? Divide 72 by your interest rate. At 7% returns: 72 ÷ 7 ≈ 10.3 years to double. At 10%: 7.2 years. At 3%: 24 years. This simple trick makes compound growth intuitive.

Why starting early beats investing more

Consider two people:

Ava starts investing $200/month at age 25 and stops at 35 (10 years, $24,000 total invested). She never invests another dollar but leaves it to grow at 7% until age 65.

Ben starts investing $200/month at age 35 and continues until 65 (30 years, $72,000 total invested) at the same 7% return.

At age 65: Ava has $329,000. Ben has $227,000. Ava invested one-third the money but ends up 45% richer because her money had 10 extra years to compound. Those first 10 years of growth generated returns that generated their own returns for three additional decades.

How compounding frequency matters

Interest can compound annually, quarterly, monthly, or daily. The more frequent the compounding, the faster your money grows — but the difference is smaller than you'd expect. $10,000 at 5% for 10 years: annual compounding gives $16,289, monthly gives $16,470, daily gives $16,487. The jump from annual to monthly matters; from monthly to daily, barely.

Most savings accounts and investments compound daily or monthly. You don't need to optimize for this — just know that your bank is already compounding frequently.

Inflation: the silent compounder working against you

Inflation compounds too, but in reverse. At 3% inflation, $100 today buys only $74 worth of goods in 10 years. This is why keeping money in a 0.01% checking account is actually losing value. Your real return is your investment return minus inflation. If you earn 7% and inflation is 3%, your real return is roughly 4%.

The Currents compound interest calculator has an inflation slider that shows you the difference between nominal and real (inflation-adjusted) future values.

Start now, not later

The most common regret in personal finance is 'I wish I'd started earlier.' Even $50/month at 7% becomes $26,000 in 20 years. That's $14,000 in pure interest — money your money made while you slept. Use the compound interest calculator to see what your numbers look like.