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."