What is Compound Interest and How Does It Work? (2026)
Updated February 2026 · 9 min read
Quick Answer
Compound interest is interest earned on both your original principal and your accumulated interest. It causes your money to grow exponentially over time — making it the most powerful force in personal finance.
Simple Interest vs Compound Interest
The difference between simple and compound interest becomes dramatic over long periods of time.
| Years | Simple Interest (7%) | Compound Interest (7%) |
|---|---|---|
| 5 years | $1,350 | $1,403 |
| 10 years | $1,700 | $1,967 |
| 20 years | $2,400 | $3,870 |
| 30 years | $3,100 | $7,612 |
| 40 years | $3,800 | $14,974 |
Based on $1,000 initial investment
The Rule of 72
The Rule of 72 is a simple way to estimate how long it takes to double your money. Divide 72 by your annual interest rate.
Why Starting Early Matters So Much
The single most important factor in compound interest is time. Here is the difference between starting at age 25 vs age 35 investing $300 per month at 7% annual return.
Start at 25
40 years of growth
Start at 35
30 years of growth
Starting 10 years earlier results in almost double the final value despite only contributing $36,000 more. This is the power of compound interest.
Calculate Compound Interest Free
Use our free compound interest calculator to see exactly how your money grows over time with different interest rates and contribution amounts.
Try the Free Compound Interest CalculatorFrequently Asked Questions
What is compound interest?
Compound interest is interest calculated on both your initial principal AND the interest you have already earned. Your money grows exponentially over time because you earn interest on your interest.
What is the difference between simple and compound interest?
Simple interest is calculated only on the original principal. Compound interest is calculated on the principal plus all previously earned interest. Over time compound interest grows much faster.
How often does interest compound?
Interest can compound daily, monthly, quarterly or annually. The more frequently interest compounds the more you earn. Daily compounding earns slightly more than monthly which earns more than annual.
What is the Rule of 72?
The Rule of 72 is a quick way to estimate how long it takes to double your money. Divide 72 by your annual interest rate. At 7% your money doubles every 10.3 years. At 10% it doubles every 7.2 years.
How can I take advantage of compound interest?
Start investing as early as possible, reinvest all dividends and interest, contribute regularly and avoid withdrawing money early. Time is the most powerful factor in compound interest.