How compound interest works, with real numbers
Compound interest is interest earned on your starting money and on the interest you have already earned. It is the reason early saving matters, and the reason debt can grow so fast.
Simple versus compound
With simple interest you earn only on the original amount. 10,000 at 7% earns 700 a year, every year, and nothing more.
With compound interest the interest is added to the balance, and next year you earn on the bigger total. After one year you have 10,700, and the second year's interest is 7% of 10,700, not 10,000.
What it looks like over time
10,000 at 7%, compounded yearly, becomes 19,671.51 after 10 years. Simple interest would give 17,000. The gap widens every year, because the interest keeps earning interest.
The rule of 72
To estimate how long it takes to double your money, divide 72 by the yearly rate. At 6% it takes about 72 / 6 = 12 years. The exact figure for 10,000 at 6% is 20,121.96 after 12 years, which is very close to double.
Small regular savings add up
Start with 5,000 and add 200 a month at 7% a year, compounded monthly. After 20 years you have put in 53,000 yourself, and the balance is about 124,379. More than 71,000 of that is interest.
Try your own numbers with the compound interest calculator, which also shows the growth year by year.
How often it compounds
Interest can be added yearly, quarterly, monthly or daily. The more often, the faster it grows, but the difference is small. 10,000 at 5% for 10 years gives 16,288.95 compounded yearly and 16,470.09 compounded monthly.
The same force works against borrowers
Credit cards and some loans compound too. Unpaid interest becomes part of what you owe, and then it earns interest of its own. This is why paying off high-interest debt early is so valuable.
Limits of any calculator
These figures assume a steady rate. Real investments rise and fall, and tax, fees and inflation reduce what you keep. Treat results as an illustration, not a promise. This is not financial advice.