Compound interest, explained simply

With simple interest you earn on the original amount only. With compound interest you also earn on the interest already added.

The formula

A = P × (1 + r/n)^(n×t)

P is the starting amount, r the yearly rate, n how many times per year interest is added and t the number of years.

An example

1,000 at 5% a year for 10 years, compounded yearly: 1,000 × 1.05^10 ≈ 1,629. Simple interest would give 1,500.

Why time matters most

The growth curve bends upward. Most of the gain arrives in the later years, so starting early beats saving a little more later.

The rule of 72

Divide 72 by the yearly rate to estimate years to double. At 6%, money doubles in about 12 years. It is an approximation, but a handy one.

Works against you, too

Compounding applies to debt. A card balance charging 20% grows quickly if only minimum payments are made.