Compound interest is the interest you earn on your initial investment (the principal) plus the interest you've already earned. In other words, it's "interest on interest." This creates a snowball effect, causing your wealth to grow at an accelerating rate over time.
Imagine you invest $1,000 at a 10% annual return. After the first year, you have $1,100. In the second year, you earn 10% on the new, larger amount of $1,100, which is $110 in interest (compared to just $100 in the first year). This cycle continues, with your investment generating ever-increasing returns each year.
The difference between simple and compound interest may seem small at first, but over time, it becomes immense. This animation shows the growth of $1,000 over 30 years at a 10% annual rate.
Compound Growth
$1,000
Year
0
Simple Growth
$1,000
Compare long‑term net worth, not just monthly payments.
Buying builds equity through principal paydown and appreciation. Renting frees cash to invest. Compare net worth over time, not monthly payments:
How each scenario is simulated under the hood.
Historically, the average annual return for the S&P 500 (a benchmark for the US stock market) is around 10-12%. After adjusting for inflation, this is often cited as 7-8%. Our calculator defaults to 7% as a realistic long-term expectation for a diversified portfolio.
The "Rule of 72" is a quick, useful shortcut to estimate how long it will take for an investment to double in value. Simply divide 72 by your annual interest rate.
72 / (Interest Rate %) = Years to Double
For example, an investment with an 8% annual return will double approximately every 9 years (72 / 8 = 9).
A = P(1 + r/n)nt
The most important factor in the compound interest equation is time. The longer your money has to grow, the more dramatic the effects of compounding will be.
Someone who starts investing $500 a month at age 25 will have significantly more money by age 65 than someone who starts investing $1,000 a month at age 45, even though they invested less of their own money. The extra 20 years of growth allow the interest to compound to a much greater degree. Our calculator can help you visualize this "cost of waiting."