Compound interest is one of the most powerful forces in finance, often called the "eighth wonder of the world." It's the process of earning interest on both your initial investment (the principal) and on the interest you've already earned. This creates a snowball effect that can dramatically grow your investments over time.

How Compound Interest Works

When you invest money that earns compound interest, your balance grows at an accelerating rate because you're earning returns on an increasingly larger amount. The key factors that affect how quickly your money grows are:

• Principal amount: Your initial investment
• Interest rate: The annual percentage yield
• Compounding frequency: How often interest is calculated (daily, monthly, yearly)
• Time: How long you leave your money invested
• Additional contributions: Any extra money you add to your investment regularly

The Rule of 72

A simple way to estimate how long it will take for your money to double is the "Rule of 72." Simply divide 72 by your annual interest rate (as a whole number). For example, with an 8% annual return, your money would double approximately every 9 years (72 ÷ 8 = 9).

The Impact of Starting Early

Due to the accelerating growth of compound interest, starting to invest early can have a dramatic impact on your final balance. Even a small amount invested in your 20s can potentially grow larger than a much larger amount invested in your 40s, thanks to the extra years of compounding.

Use our compound interest calculator to experiment with different scenarios and see how your investments might grow over time. Remember that all projections are estimates based on the inputs you provide, and actual returns may vary based on market performance and other factors.