Compound interest is the mechanism that makes your money grow exponentially over time. Unlike simple interest (calculated only on the principal), compound interest earns interest on previously earned interest.
The Compound Interest Formula
A = P(1 + r/n)^(nt)
Where: A = final amount, P = principal, r = annual rate, n = compounding frequency per year, t = years.
Example
$10,000 at 7% compounded monthly for 10 years: A = $10,000 × (1 + 0.07/12)^(12×10) = $20,096.61. You earned $10,096.61 — more than doubling your money.
The Rule of 72
Divide 72 by your interest rate to estimate how many years it takes to double your money. At 7%, your money doubles in roughly 72 ÷ 7 ≈ 10.3 years.