Compound interest is interest earned on interest. Unlike simple interest — which only ever pays you on your original deposit — compounding pays you on your deposit plus every bit of interest you've already earned. That feedback loop is what makes money grow faster and faster over time.
The formula
The future value of a lump sum under compound interest is:
A = P × (1 + r/n)^(n·t)
- A — final amount
- P — principal (your starting deposit)
- r — annual interest rate (as a decimal, so 7% = 0.07)
- n — how many times per year interest compounds
- t — number of years
The two levers people underestimate are n (compounding frequency) and, above all, t (time). Time is exponential, not linear — which is why it dominates.
Why starting early beats saving more
A classic example. Two savers each earn 7% a year:
- Anna invests $200/month from age 25 to 35 (10 years), then stops and never adds another dollar.
- Ben invests $200/month from age 35 all the way to 65 (30 years).
Anna contributes $24,000 total. Ben contributes $72,000 — three times as much. Yet at 65, Anna typically ends up with more money than Ben, because her earlier dollars had an extra decade to compound. The head start outweighs the larger total contribution.
That's the whole point: with compounding, when you invest matters more than how much.
The Rule of 72
Want a quick estimate of how long money takes to double? Divide 72 by the annual rate:
- At 6%, money doubles in about 72 ÷ 6 = 12 years.
- At 9%, about 8 years.
It's an approximation, but a remarkably good one for rates in the normal range.
Try it on your own numbers
Plug your starting amount, monthly contribution, rate, and time horizon into the compound interest calculator to see the curve for your own situation — and watch what happens when you push the start date just a few years earlier.
This article is educational and not personalized financial advice.