How Compound Interest Works
You earn interest on your interest — so money grows exponentially, not linearly, and the longer you wait the more dramatic the effect
- Simple interest: you earn interest only on the original amount (principal)
- Compound interest: at the end of each period, interest is added to the principal
- Next period, you earn interest on the larger amount — including the previously earned interest
- This creates exponential growth: a small difference in rate or time produces an enormous difference in outcome
- The Rule of 72: divide 72 by your interest rate to find how many years it takes to double your money (e.g., 8% → 9 years)
★Einstein allegedly called compound interest 'the eighth wonder of the world' (historians dispute this, but the math is real). $1,000 at 7% for 50 years becomes $29,000 through compounding. The same money at simple interest would only become $4,500. The last 10 years of a 50-year investment produce more than the first 40 combined.