Compound interest

Compound interest is interest paid on your money and on the interest it has already earned. Interest is the extra money a bank or an investment pays you.

Each year, the interest joins your money. The next year, you earn interest on the bigger amount. So your money grows faster over time.

The Rule of 72 gives a quick estimate. Divide 72 by the yearly rate. The answer is about how many years your money takes to double.

Why it matters

The longer money stays, the more compound interest adds. Starting early gives it more years to work, even with small amounts. At a 9% yearly return, money doubles about every 8 years, because 72 divided by 9 is 8.

A worked example

You save $100 at 5% interest a year. After one year, you have $105. After two years, you have $110.25: $5 on the $100, and $0.25 on the first year's interest. After 10 years, you have more than $162, and you never added any money.