Compound Interest: How Your Money Grows Over Time

July 9, 2025 • 4 min read

Albert Einstein reportedly called compound interest "the eighth wonder of the world." Whether or not the quote is real, the principle is powerful: earning interest on your interest can turn small savings into significant wealth over time.

Simple vs Compound Interest

• ▶ Simple interest: You earn interest only on your original deposit. $1,000 at 5% earns $50 every year forever
• ▶ Compound interest: You earn interest on your deposit PLUS previous interest. $1,000 at 5% earns $50 in year 1, then $52.50 in year 2, then $55.13 in year 3, and so on

The Formula

The Power of Time: A Real Example

Invest $5,000 at 7% annual return (compounded annually):

• ▶ After 10 years: $9,836 (almost doubled)
• ▶ After 20 years: $19,348 (nearly 4x)
• ▶ After 30 years: $38,061 (over 7.5x)
• ▶ After 40 years: $74,872 (nearly 15x your original investment)

The Rule of 72

Want to know how long it takes to double your money? Divide 72 by your interest rate:

• ▶ At 4%: 72 / 4 = 18 years to double
• ▶ At 6%: 72 / 6 = 12 years to double
• ▶ At 8%: 72 / 8 = 9 years to double
• ▶ At 10%: 72 / 10 = 7.2 years to double

Why Starting Early Matters

Consider two investors both earning 7% annually:

• ▶ Person A: Invests $200/month from age 25 to 65 (40 years) = $96,000 invested, grows to approximately $525,000
• ▶ Person B: Invests $200/month from age 35 to 65 (30 years) = $72,000 invested, grows to approximately $243,000

Person A invested only $24,000 more but ended up with $282,000 more. That is the power of those extra 10 years of compounding.