Compound Interest: The Eighth Wonder of the World

Albert Einstein reportedly called compound interest the eighth wonder of the world. Whether or not he said it, the math behind compounding is genuinely powerful.

How It Works

Simple interest earns returns only on your principal. Compound interest earns returns on your returns. A $10,000 investment at 8% annual return becomes $21,589 in 10 years with compounding, compared to $18,000 with simple interest.

The Rule of 72

Divide 72 by your annual return rate to estimate how many years it takes to double your money. At 8%, your money doubles roughly every 9 years. At 10%, every 7.2 years.

Time Is Everything

Starting early is more important than investing large amounts later. Someone who invests $200/month starting at age 25 will have more at 65 than someone who invests $400/month starting at 35, assuming the same returns.

Compounding Frequency

Interest can compound annually, quarterly, monthly, or daily. More frequent compounding produces slightly higher returns. The difference between annual and monthly compounding on a $10,000 investment at 8% over 10 years is about $180.

Try It Yourself

Use our Compound Interest Calculator to see how your money can grow. Experiment with different monthly contributions and time horizons to find what works for your goals.