Compound Interest Explained: The Math That Builds (or Destroys) Wealth
By Jordan Ellis · Published · Reviewed
Quick Answer
Compound interest is interest earned on your original money plus all previously earned interest, causing growth to accelerate over time. $10,000 at 7% becomes $19,672 in 10 years, $38,697 in 20, and $76,123 in 30 — doubling time can be estimated with the Rule of 72: 72 ÷ rate = years to double.
The one-sentence version
Simple interest pays you on your deposit; compound interest pays you on your deposit and on every payment it ever made you. That tiny difference is the entire engine of long-term wealth.
What it does to $10,000 at 7%
| Years | Simple interest | Compound interest |
|---|---|---|
| 10 | $17,000 | $19,672 |
| 20 | $24,000 | $38,697 |
| 30 | $31,000 | $76,123 |
| 40 | $38,000 | $149,745 |
Notice the shape: the compound column doesn’t grow by the same amount each decade — it grows by more. The last decade adds $73,622, more than the first three combined. Growth curves, and the curve bends upward late. That’s why every compounding story is really a story about time.
The formula, demystified
A = P(1 + r/n)nt
- A — what you end with
- P — what you start with
- r — annual rate (7% = 0.07)
- n — compounding periods per year (12 for monthly)
- t — years
Frequency matters less than people think: monthly versus annual compounding on $10,000 at 7% differs by about $1,700 over 20 years ($40,387 vs $38,697). The rate and the years dominate. Play with every variable in the compound interest calculator.
Why starting beats amount
Saver A invests $300/month from 25 to 35, then stops ($36,000 total). Saver B invests $300/month from 35 to 65 ($108,000 total). At 7% compounded monthly, at age 65: A has roughly $421,000; B has roughly $366,000. A contributed one-third as much and finished ahead, because A’s money spent a full extra decade on the steep part of the curve. There is no catch-up mechanism as powerful as an early start.
The dark side: compounding against you
Credit card interest is calculated daily and added to your balance each month. A 24% APR unpaid balance doubles in about 3 years. Minimum payments are engineered to hover just above the monthly interest charge, keeping you on the flat part of the debt curve forever — the mirror image of the investor’s problem. If this is your situation, the escape plan is in our credit card debt guide and the credit card payoff calculator.
The bottom line
Compound interest rewards exactly two things: rate and time. You can shop for rate; you cannot buy back time. Start with what you have, automate contributions, and let the curve do what it does. Working toward a specific target? The savings goal calculator turns any goal into a monthly number.
Official sources
Rules and dollar limits change. Confirm current amounts with the official pages below before you act · Last reviewed .
- GetSmarterAboutMoney investor education (Ontario Securities Commission)