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Module 7 of 8 15 min

Compound Interest

Interest on your interest — the most powerful idea in personal finance, and why time is your advantage.

Course lessons

Step 1

The lesson

Interest is the price of using money. When you save, the bank pays you interest. When you borrow, you pay interest to the lender.

Simple interest is paid only on the money you started with. Compound interest is paid on the money you started with plus the interest you've already earned. In other words: you earn interest on your interest.

Here's $1,000 growing at 10% a year (a round number to keep the math easy):

  • Year 1: 10% of $1,000 = $100 → $1,100
  • Year 2: 10% of $1,100 = $110 → $1,210
  • Year 3: 10% of $1,210 = $121 → $1,331

Each year's interest is bigger than the last, because it's calculated on a bigger balance. With simple interest, you'd have $1,300 after three years. The gap looks tiny at first — then it gets huge.

Three things drive compound growth: how much you put in, the rate, and time. As a student, time is the one you have the most of.

Step 2

See it

$1,000 at 10% a year: simple vs. compoundHypothetical example

Simple interest grows $1,000 by the same $100 every year, reaching $4,000 after 30 years. Compound interest reaches $17,449 after 30 years.

Step 3

Real-world example

Alex starts early. Jamie starts later.

Two people each invest $50 a month and earn the same hypothetical 7% a year.

  • Alex invests from age 15 to 25 — ten years — then stops adding money and lets it grow. Total put in: $6,000.
  • Jamie starts at 25 and invests every month until 65 — forty years. Total put in: $24,000.

At 65, Alex has about $141,163. Jamie has about $131,241. Alex put in a quarter as much money and still ends up with more — because Alex's money had ten extra years to compound.

Step 4

Try it: compound growth calculator

Start with $1,000, add $50 a month for 10 years at a hypothetical 7% return — then change the numbers and watch the growth.

Your numbers

Real returns vary year to year and can be negative.

Results

Hypothetical balance after 10 years

$10,664

Compounded monthly at a constant 7% a year

You contributed

$7,000

Hypothetical growth

$3,664

Growth share

34%

of the final balance

Hypothetical balance by year. After 10 years the balance is $10,664, made of $7,000 in contributions and $3,664 in hypothetical growth. Use the arrow keys to step through years, or open the table below.
Show year-by-year table
Hypothetical balance by year
YearContributedGrowthBalance
1$1,600$92$1,692
2$2,200$234$2,434
3$2,800$429$3,229
4$3,400$683$4,083
5$4,000$997$4,997
6$4,600$1,378$5,978
7$5,200$1,830$7,030
8$5,800$2,358$8,158
9$6,400$2,967$9,367
10$7,000$3,664$10,664

Educational calculator, not financial advice. Results are hypothetical estimates based on the numbers you enter.

Step 5

Knowledge check

Answer each question, then check your answer to see the explanation. Retake it as many times as you like.

Question 1 of 4

ScenarioTwo friends each put $1,000 into accounts earning the same hypothetical 6% a year, compounded. One leaves it for 10 years; the other leaves it for 30.Why does the 30-year balance end up more than three times the 10-year balance?

Choose an answer.

Step 6

Summary

Compound interest means earning interest on your interest, so growth speeds up over time. Growth depends on how much you put in, the rate, and time — and time is the biggest advantage students have. Compounding also makes debt grow, and real returns are never guaranteed.

Step 7

What you should remember

  • Compound interest = interest on your interest.
  • Growth depends on amount, rate, and time. Time is your biggest advantage.
  • Rule of 72: 72 ÷ rate ≈ years to double.
  • Compounding makes debt grow too.
  • Calculators show hypothetical scenarios. Real returns vary and aren't guaranteed.

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