How Compound Interest Works (with Examples)
Compound interest is often called the eighth wonder of the world because it makes money grow on money. Understanding it helps you save smarter and judge loans honestly. Here is how it works.
Simple vs compound interest
Simple interest is paid only on your original amount (the principal). Compound interest is paid on the principal plus all the interest already earned — so each period grows a little faster than the last.
The formula
A = P × (1 + r ÷ n)^(n × t), where P is the principal, r the annual rate, n how many times a year it compounds, and t the years.
Example: 1,000 at 5% compounded monthly for 10 years grows to about 1,647 — roughly 647 of pure interest. The Compound Interest Calculator shows this instantly.
Why time matters most
Because growth builds on itself, the early years lay the foundation and the later years grow fastest. Starting sooner — even with small amounts — usually beats starting later with more, thanks to the extra compounding periods.
Putting it to work
To plan around a target, the Savings Goal Calculator shows how long regular deposits take to reach an amount, and the CAGR Calculator turns any start-to-end growth into a single annual rate for comparison.
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Last updated: July 6, 2026