Frequently Asked Questions
What is compound interest?
Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. Unlike simple interest — which is calculated only on the principal — compound interest grows exponentially. This "interest on interest" effect makes it one of the most powerful forces in long-term investing. Albert Einstein reportedly called it the "eighth wonder of the world."
How do I calculate compound interest?
The standard compound interest formula is:
A = P(1 + r/n)nt
Where A is the final amount, P is the initial principal, r is the annual interest rate (as a decimal), n is the number of compounding periods per year, and t is the time in years. When you add regular monthly contributions, each contribution also earns compound interest from the moment it is added, increasing your total return further.
What is the difference between simple and compound interest?
Simple interest is calculated only on the original principal using the formula Interest = P × r × t. Compound interest reinvests the earned interest so it also earns returns. The difference compounds dramatically over time: $10,000 at 7% for 30 years yields $21,000 in simple interest, but over $76,000 with annual compounding — more than three times as much. The longer the time horizon and the higher the compounding frequency, the greater the advantage of compound interest.
How much will $10,000 grow in 10 years at 7% interest?
At 7% compounded annually, $10,000 grows to approximately $19,671 after 10 years — nearly doubling. With monthly compounding the same principal reaches about $20,097. Adding a $100 monthly contribution on top brings the total to roughly $37,025 with monthly compounding over the same period. These examples illustrate how both compounding frequency and consistent contributions meaningfully increase long-term wealth.