Compound interest: what it is and how it grows your money
The difference with simple interest, the formula and examples with real numbers.
Table of contents
Simple vs compound
With simple interest, interest is always calculated on the initial capital. With compound interest, each period the interest is added to the capital and starts earning its own interest: interest on interest.
The difference looks small at first, but over the years it becomes huge. That is why compound interest gets called the most powerful force in finance.
Example with numbers
You invest €10,000 at 5% annual for 10 years. With simple interest you would have €15,000. With compound interest: 10,000 × 1.05 to the 10th, about €16,289. That extra ~€1,289 was generated by the interest itself, without you adding more money.
Try your own figures with the compound interest calculator and see how the result changes as you move the horizon.
The rule of 72
A super-fast mental trick: divide 72 by the interest rate and you get the years needed to double your money. At 6% it takes about 12 years; at 8%, about 9. Useful for comparing products at a glance.
Time rules (and contributions help)
The factor that weighs most is not the interest rate, but starting early: every extra year compounds on top of everything before it. And if you also add a fixed amount every month, growth accelerates even more.