How compound interest works
Compound interest is calculated on both the original principal and the interest already earned, using A = P(1 + r/n)^(nt), where P is principal, r is the annual rate, n is the compounding frequency, and t is time in years. Unlike simple interest, your money earns "interest on interest," which is why the growth curve accelerates over longer periods.
Why compounding frequency matters
More frequent compounding (monthly vs yearly, for example) produces slightly higher returns for the same nominal rate, since interest is calculated and added to the principal more often. The difference is small at low rates and short durations, but becomes meaningful over decades.
The rule of 72
A quick mental shortcut: divide 72 by your annual interest rate to estimate how many years it takes for your money to double. At 8% annual return, that's roughly 9 years (72 ÷ 8).
Frequently asked questions
Does inflation affect this calculation? No, this shows nominal growth only. To estimate real (inflation-adjusted) growth, subtract your expected inflation rate from the interest rate before calculating.
Is compound interest only for savings? No — it works the same way against you on debt (like credit cards), which is why unpaid interest can grow balances quickly if not paid down.