Try it yourself: use our free compound interest calculator to run your own numbers.
Compound interest means you earn returns on your original money and on the returns it has already earned. Early on the difference is small. After a couple of decades it is the main reason the balance gets large.
The formula
A = P × (1 + r/n)nt
A is the final amount, P is what you start with, r is the yearly rate as a decimal, n is how many times per year it compounds, and t is the number of years. You do not need to calculate this by hand. Our compound interest calculator does it for you.
One lump sum
Take $10,000 earning 7% a year, compounded annually. These are illustrations, not predictions.
| Years | Balance |
|---|---|
| 10 | $19,672 |
| 20 | $38,697 |
| 30 | $76,123 |
The first ten years add about $9,700. The last ten add about $37,400, even though nothing new went in.
The Rule of 72
Divide 72 by your yearly return to estimate how long it takes to double. At 7%, 72 ÷ 7 is about 10.3 years. At 3%, it is 24 years. This is a rough shortcut, and it shows why a few percentage points matter so much.
Adding money every month
Now suppose you invest $300 a month at 7%, compounded monthly.
| Years | You put in | Balance |
|---|---|---|
| 10 | $36,000 | $51,925 |
| 20 | $72,000 | $156,278 |
| 30 | $108,000 | $365,991 |
After 30 years, roughly $258,000 of that balance is growth, more than twice what you contributed.
Why starting early matters
Keep the same $300 a month and 7%. Invest for 30 years and you end up with about $365,991. Invest for 40 years and it is about $787,444. Ten extra years more than doubles the result, because the extra decade is the one with the biggest balance working for you.
What the examples leave out
- Returns are not steady. Markets go up and down, and a 7% average does not mean 7% every year.
- Fees. A 2% fund fee takes a big bite of a 7% return. See how fees compare across fund types.
- Taxes. Accounts like the TFSA let growth compound without yearly tax.
- Inflation. A dollar in 30 years buys less than a dollar today. See how inflation affects your savings.
The same effect works against you
Credit card debt compounds too, usually at a much higher rate than investments earn. Paying down high-interest debt is a guaranteed return equal to the interest you stop paying.
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This article is for general education and is not financial or investment advice. Figures and rules change, so check current information and consider speaking with a licensed professional before you act.
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