Albert Einstein famously called compound interest the eighth wonder of the world: “He who understands it, earns it; he who doesn’t, pays it.”
What exactly is compound interest?
Unlike simple interest, which only pays you based on your initial deposit, compound interest pays you interest on your interest.
Imagine a snowball rolling down a hill. At first, it gathers a tiny amount of snow. As it gets bigger, it gathers exponentially more every rotation. This is exactly how long-term wealth is built.
Example Calculation
If you invest $10,000 at a 10% annual return, after Year 1 you make $1,000. Your new balance is $11,000.
In Year 2, you earn 10% of $11,000, which is $1,100.
By Year 30, that same $10,000 deposit can grow to around $174,000.
Start experimenting now
The best way to understand compounding is to visualize it using your own assumptions.
Related Articles
Continue your learning path with these related guides.
Stop Reading, Start Modeling.
The best way to understand financial mechanics is to run the math on your own life. Use our free toolkit.
Go To Calculators Hub →Reviewed by
InvestTool Financial Team
Certified Financial Modeling Expert | 10+ years experience
Our analysts and editors specialize in long-term investment modeling, scenario analysis, and practical decision frameworks for everyday investors.
All content is reviewed for mathematical accuracy. Not financial advice.