Compound interest is simpler than it sounds

Here's the basic idea: you put money in a bank, the bank pays you interest, and then you earn interest on that interest too. That's it. That's compound interest.

Say you deposit $1,000 at 5% annual interest. After year one, you have $1,050. Nothing special. But in year two, you earn 5% on $1,050 — not just the original $1,000. That's $52.50 instead of $50. Small difference now, but over decades it gets dramatic.

Why compounding frequency matters

Banks compound interest at different intervals — annually, monthly, or daily. The more frequently they compound, the faster your money grows, because each calculation adds a tiny bit more for the next one to build on.

• Annually: Interest added once a year. Simple, but slowest growth.
• Monthly: Interest added 12 times a year. This is what most savings accounts use.
• Daily: Interest added 365 times a year. Highest return for the same rate.

The difference between annual and daily compounding on a typical savings account is small. But on larger amounts over longer periods, it adds up.

APR vs APY

APR (Annual Percentage Rate) is the simple interest rate. APY (Annual Percentage Yield) factors in compounding. When comparing accounts, look at APY — it tells you what you'll actually earn. A 5% APR compounded monthly gives you about 5.12% APY.

The real trick is time

Compound interest rewards patience more than anything. Someone who starts saving $100/month at 25 will have significantly more at 65 than someone who starts the same amount at 35 — even though the difference is only 10 years of deposits. The early money has decades of compounding behind it.

Einstein probably didn't actually call it the "eighth wonder of the world" (that quote has no reliable source), but the math is genuinely surprising when you see it over long time horizons. Play with the calculator above and try 20 vs 30 years — the gap is bigger than you'd expect.

Note: This calculator gives estimates for educational purposes. Actual returns vary based on changing rates, fees, taxes, and inflation.