Compound Interest Explained: Why Time Beats Timing

Compound interest means earning interest on your interest. Each period the interest is added to your balance, and the next period's interest is worked out on that larger amount. The growth looks small at first and then speeds up, which is why time is the most powerful thing in your favour.

The compound interest formula

A = P × (1 + r/n)^(n × t)

• A is the final amount
• P is the starting principal
• r is the annual rate as a decimal
• n is how many times a year interest is compounded
• t is the number of years

Simple vs compound: a quick example

Invest 100,000 at 8% a year for 20 years:

Simple interest pays the same 8,000 every year. Compounding nearly doubles that result because the returns themselves earn returns.

The Rule of 72

For a quick estimate of how long money takes to double, divide 72 by the annual rate:

• 6% → about 12 years
• 8% → about 9 years
• 12% → about 6 years

Why starting early wins

Picture two savers. One invests for 10 years from age 25 and then stops. The other starts at 35 and invests for 25 years. Because the early saver's money has longer to compound, they often end up with a comparable or even larger amount despite investing far less. Time in the market does more of the work than the amount you put in.

Things that slow compounding down

• Fees and expense ratios, which are deducted every year
• Taxes on interest or gains
• Withdrawals that reset the snowball
• Inflation, which reduces what the final amount can buy

Try it yourself

Open the compound interest calculator. Change the time period first, then the rate, then the compounding frequency. You'll see the effect of each in that order. Add a small monthly contribution and watch how the gap widens over decades.

Frequently asked questions

What is the Rule of 72?

Divide 72 by the annual return to estimate how many years it takes for money to double. At 8%, money doubles in about 9 years.

Does daily compounding make a big difference?

Only slightly compared with monthly compounding. The rate and the length of time matter far more.