Compound interest is earning interest on your interest. When your money earns a return and that return is reinvested to earn its own return, you get exponential growth — not linear growth. Einstein reportedly called it “the eighth wonder of the world,” and the math backs it up.
Simple vs compound interest
With simple interest, you earn a fixed percentage of your original amount every year. $10,000 at 10% simple interest earns $1,000/year every year — $10,000 after 10 years. With compound interest, you earn 10% on the growing balance — $10,000 becomes $25,937 after 10 years. Same rate, wildly different outcome.
The Rule of 72
To estimate how long it takes your money to double, divide 72 by your annual return rate. At 8% returns, your money doubles every 9 years (72 ÷ 8 = 9). At 10%, it doubles every 7.2 years. This is why starting early matters so much — you get more doublings over time.
The flip side: compound interest on debt
Compound interest works against you when you’re in debt. Credit cards compound daily at 20%+ APR. A $5,000 balance at 22% APR that you only make minimum payments on could take over 10 years to pay off and cost you thousands in interest. The same math that builds wealth can destroy it.
How to make compound interest work for you
Start as early as possible. Reinvest your returns rather than withdrawing them. Use tax-advantaged accounts like Roth IRAs and 401ks where compound growth happens without being taxed year over year. And get out of high-interest debt — it’s compound interest working against you.