What Is Compound Interest? How It Works (With Examples)
By Jorge Sanchez · May 4, 2026 · 6 min read
Compound interest means you earn interest not just on your original money, but on all the interest you've already earned. It sounds simple, but the results are dramatic — especially over long time periods. Albert Einstein reportedly called it the "eighth wonder of the world."
Simple Interest vs. Compound Interest
With simple interest, you earn interest only on your original principal:
| Year | Simple Interest (8%) | Compound Interest (8%) |
|---|---|---|
| 1 | $10,800 | $10,800 |
| 5 | $14,000 | $14,693 |
| 10 | $18,000 | $21,589 |
| 20 | $26,000 | $46,610 |
| 30 | $34,000 | $100,627 |
The Compound Interest Formula
The standard formula is:
- A = final amount
- P = principal (starting amount)
- r = annual interest rate (as a decimal)
- n = how many times interest compounds per year
- t = time in years
Example: $10,000 at 8% compounded monthly for 30 years:
How Often Does Interest Compound?
| Frequency | n | $10k @ 8% for 30 years |
|---|---|---|
| Annually | 1 | $100,627 |
| Quarterly | 4 | $107,652 |
| Monthly | 12 | $109,357 |
| Daily | 365 | $110,232 |
More frequent compounding = slightly more money, but the difference between monthly and daily is small. What really matters is the rate and the time.
The Rule of 72
A quick mental math shortcut: divide 72 by your interest rate to estimate how long it takes to double your money.
- At 6%: 72 ÷ 6 = 12 years to double
- At 8%: 72 ÷ 8 = 9 years to double
- At 12%: 72 ÷ 12 = 6 years to double
Compound Interest Works Against You Too
The same math that grows your savings destroys you on debt. A $5,000 credit card balance at 24% APR compounded daily — if you make only minimum payments — can take over 15 years to pay off and cost $10,000+ in interest.
That's why high-interest debt should almost always be paid off before investing.
How to Use Compound Interest to Build Wealth
- Start early. Time is the most powerful variable. Starting at 25 vs. 35 can mean hundreds of thousands of dollars difference by retirement.
- Contribute regularly. Monthly contributions accelerate growth dramatically.
- Reinvest dividends. Don't take dividends as cash — reinvest them to compound faster.
- Keep fees low. A 1% fund fee compounds against you just like interest compounds for you.