See how your savings and investments grow over time with the power of compound interest
Compound interest is often called the eighth wonder of the world because it allows your money to grow exponentially over time. Unlike simple interest, which is calculated only on your original principal, compound interest earns interest on both your principal and any previously accumulated interest. The formula A = P(1 + r/n)^(nt) captures this effect, where P is the principal, r is the annual rate, n is the compounding frequency, and t is time in years. The more frequently interest compounds, the faster your balance grows.
Regular monthly contributions dramatically amplify the power of compounding. Even modest deposits of $100 or $200 per month can grow into substantial sums over 20 or 30 years. This is because each contribution immediately begins earning its own compound interest. For example, investing $500 per month at a 7% annual return for 30 years yields over $566,000 -- even though you only contributed $180,000 out of pocket. The remaining $386,000 comes entirely from compound growth.
The compounding frequency -- daily, monthly, quarterly, or annually -- affects your total return, though the difference narrows at lower interest rates. Daily compounding earns slightly more than annual compounding because interest is reinvested more often. The most important factors for maximizing compound growth are starting early, contributing consistently, and allowing your investments enough time to grow. A 25-year-old investing $300 per month will accumulate far more by retirement than a 35-year-old investing $500 per month, simply because of the extra decade of compounding.