What is Compound Interest?
Compound interest is the interest calculated not only on the initial principal but also on all the accumulated interest from previous periods. While simple interest only earns returns on your original investment, compound interest earns returns on your returns. For example, $10,000 invested at 8% simple interest earns $800 every year. But with compound interest, you earn $800 the first year, $864 the second year (8% of $10,800), and $933 the third year—growing exponentially. This accelerating growth is called the 'Snowball Effect'—like a small snowball rolling downhill, gathering more snow and momentum as it goes. Albert Einstein reportedly said, "Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it." Warren Buffett started investing as a teenager and has let compound interest work for over 80 years, turning modest savings into billions. Use this calculator to visualize your own wealth-building journey.
Simple vs Compound Interest ($10,000 at 8%)
| Type | 10 Years | 20 Years | 30 Years |
|---|---|---|---|
| Simple | $18,000 | $26,000 | $34,000 |
| Compound | $21,589 | $46,610 | $100,627 |
After 30 years, compound interest earns ~3x more!
