What is Compound Interest?
Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. Unlike simple interest (which only earns on the original amount), compound interest causes your balance to grow exponentially. The more frequently interest compounds — daily, monthly, quarterly — the faster your money grows. The formula is: A = P(1 + r/n)^(nt) where A is the final amount, P is the principal, r is the annual rate as a decimal, n is the compounding frequency per year, and t is the time in years.
Frequently Asked Questions
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 6% annual return, 72 ÷ 6 = 12 years to double. At 9%, it's 8 years. At 12%, it's 6 years. This works for any compounding investment including savings accounts, index funds, and real estate.
The S&P 500 has historically returned an average of 10–11% annually before inflation, or about 7–8% after inflation. High-yield savings accounts currently offer 4.5–5.5% APY in 2025. Treasury bonds average 4–5%. Use 7% as a conservative real-return estimate for long-term stock market investing, 4–5% for bonds, and 4–5.5% for high-yield savings.
More frequent compounding results in slightly more growth. $10,000 at 10% annually for 10 years: annually = $25,937; monthly = $27,070; daily = $27,180. The difference between monthly and daily is small but annual vs. monthly compounding can be meaningful over long periods. Most banks compound interest monthly or daily.