How Compound Interest Works
Understand how money grows when interest earns interest — the math, examples, and why starting early matters.
6 min read · Last updated: July 13, 2026
What is compound interest?
Compound interest is interest calculated on your initial principal plus all accumulated interest from previous periods. Unlike simple interest (which only applies to the original amount), compounding means your money grows at an accelerating rate over time. Savings accounts, investment portfolios, and retirement funds all benefit from compounding when returns are reinvested.
The compound interest formula
Future Value = P(1 + r/n)^(nt), where P is principal, r is annual rate, n is compounding periods per year, and t is time in years. With regular contributions, each deposit also compounds. The key insight: later periods earn interest on a larger base, so growth is exponential, not linear.
The Rule of 72
Divide 72 by your annual return rate to estimate how many years it takes to double your money. At 7% return, money doubles in roughly 72 ÷ 7 ≈ 10.3 years. This quick mental math shows why even modest return differences matter over decades.
Why starting early matters
Someone who invests $200/month from age 25 to 35 (10 years, $24,000 total) can end up with more than someone who invests $200/month from 35 to 65 (30 years, $72,000 total) — assuming the same return rate. Time is the most powerful variable in compounding.
Try it yourself
Use the CalcVo Compound Interest Calculator to model your own scenario with custom rates, contribution amounts, and time horizons. All calculations run in your browser with live growth charts.