Compound Interest (Savings)

Compound interest is what happens when your interest starts earning its own interest. Say you put $10,000 in a savings account at 5% APY. In year one, you earn $500 (bringing you to $10,500). In year two, you earn 5% on $10,500—that's $525 (total: $11,025). Each year the interest grows because the base keeps getting bigger.

How often compounding happens makes a difference. Daily compounding (the standard for savings accounts) produces a bit more than monthly or yearly compounding. A $10,000 deposit at 5% yields $10,512.67 with daily compounding versus $10,500 with annual—a small gap that widens with larger balances and longer time horizons.

Here's a handy shortcut called the Rule of 72: divide 72 by your interest rate to estimate how long it takes to double your money. At 6%, your money doubles in ~12 years. At 10%, ~7.2 years. It's a quick way to see why starting early matters so much—each doubling multiplies everything that came before it.

Compound interest also works against you when you're in debt. Credit card balances at 20% APR compound monthly, meaning you're paying interest on your interest charges. A $5,000 balance with only minimum payments can take 15+ years to clear, with total interest exceeding the original amount you owed.

There's a famous (possibly misattributed) Einstein quote calling compound interest the eighth wonder of the world. Whether he said it or not, the point stands: time is the most powerful ingredient in the compounding recipe. Starting 10 years earlier with less money often beats starting later with more, because those extra years of compounding create exponential growth.