Compound interest explained, with real numbers

Compound interest means you earn a return not just on your original money, but on the returns it already made. That sounds small in year one. Over 20 or 30 years, it's the entire reason retirement accounts work.

The formula, in words

Take your balance, add this period's interest to it, and next period's interest is calculated on that new, larger number. Do this monthly or annually for long enough and the growth curve stops looking like a straight line and starts curving upward.

A worked example

Put $300 a month into an account earning 7% a year, compounded monthly. After 10 years you've contributed $36,000 — but the balance is closer to $52,000. After 30 years you've contributed $108,000, and the balance is over $360,000. The contributions grew three times; the balance grew more than eight times. That gap is compounding doing the work.

Why starting early beats contributing more

Someone who invests $200/month starting at 25 and stops at 35 (ten years of contributions, then nothing more) will typically end up with more at 65 than someone who starts at 35 and contributes $200/month every year until 65. The first person put in less money overall but gave it more time to compound. Time in the market matters more than the size of any single contribution.

What changes the outcome most

Three variables drive the result: the rate of return, how often interest compounds, and how long the money sits. Of these, time is the one most people underestimate — a few extra years at the end of a savings horizon often add more than an increase in the contribution amount.

A note on today's rates

Updated August 2026: high-yield savings accounts have been offering meaningfully higher rates than the low-rate years of the early 2020s, which makes the gap between "money sitting in a 0.01% checking account" and "money in a compounding high-yield account" larger than it's been in some time — worth checking your own account's actual rate against current market offers.