What is compound interest and how does it work? (with examples)

Compound interest is the mechanism by which your money earns interest and, in turn, that interest earns new interest. It is the difference between always earning on the same amount (simple interest) and earning on a base that grows every year.

Simple vs. compound interest

Imagine you invest €10,000 at 7% per year:

• Simple interest: you earn €700 every year, always on the initial €10,000.
• Compound interest: the first year you earn €700, but the second you earn 7% of €10,700 (€749); the third, on €11,449… and so on.

Over time that difference becomes an abyss. Over 30 years, simple interest would give €21,000; compound interest, more than €66,000.

The compound interest formula

FV = C × (1 + i)ⁿ

Where FV is the final value, C the initial capital, i the interest rate per period and n the number of periods. If you also make periodic contributions, an annuity term is added. Our calculator does that math for you, month by month.

Why time is your best ally

Compound interest is exponential: the last years contribute far more than the first ones. That is why starting early —even with a little— usually beats starting late with a lot.

The rule of 72

Divide 72 by your annual return and you get the years it takes your money to double. At 7%, it doubles every ≈10.3 years; at 10%, every ≈7.2 years.

In short

• Compound interest makes you earn interest on your interest.
• Its effect grows exponentially with time.
• Starting early and being consistent matters more than the initial amount.