Discover how your investments can grow over time through the power of compound interest.
Compound interest is the interest calculated on the initial principal and also on the accumulated interest of previous periods. It's often called "interest on interest" and can cause wealth to grow exponentially over time.
If you invest $10,000 at an annual interest rate of 7% compounded monthly for 20 years with $100 monthly contributions:
Your initial investment would grow to approximately $75,604.
You would have contributed $34,000 in total, and earned $41,604 in interest.
The power of compound interest comes from reinvesting your earnings, which then generate their own earnings. Over long periods, this creates a snowball effect where your money grows faster and faster.
| Year | Simple Interest | Compound Interest | Difference |
|---|---|---|---|
| 5 | $13,500.00 | $14,207.65 | $707.65 |
| 10 | $17,000.00 | $20,096.70 | $3,096.70 |
| 20 | $24,000.00 | $40,395.63 | $16,395.63 |
| 30 | $31,000.00 | $81,273.74 | $50,273.74 |
As shown in the table, the difference between simple and compound interest becomes more significant over longer time periods. This demonstrates why starting to invest early is so important for long-term wealth building.
The formula for compound interest is:
Where:
A = Future value of the investment
P = Principal investment amount
r = Annual interest rate (decimal)
n = Number of times interest is compounded per year
t = Time in years
PMT = Monthly contribution amount
The Rule of 72 is a simple way to estimate how long it will take for an investment to double:
For example, at 7% interest, it would take approximately 10.3 years for your investment to double.
• Time: The longer your money compounds, the more it grows
• Rate of return: Higher rates accelerate growth
• Compounding frequency: More frequent compounding yields higher returns
• Regular contributions: Adding money regularly significantly boosts results