How Compound Interest Works: Formula, Rule of 72 & Visual Examples
Simple interest only pays on your principal, but compound interest pays interest on your accumulated interest, causing your money to grow on an accelerating curve.
Key Financial Takeaways
- Compounding frequency matters: Daily/monthly compounding generates higher yield than annual compounding.
- Time is the most powerful variable in the compounding formula — starting 5 years earlier can double your final wealth.
- The Rule of 72 lets you quickly calculate doubling time: 72 / Return Rate = Years to double.
Compound Interest Calculator
Simulate your own numbers with instant mathematical accuracy on our free tool.
The Mathematical Formula
The compound interest formula is: A = P × (1 + r/n)^(n × t)
Where A = Final Amount, P = Initial Principal, r = Annual Interest Rate (decimal), n = Compounding frequency per year, and t = Number of years.
Frequently Asked Questions
What is the difference between APR and APY?
APR is the stated annual interest rate, while APY (Annual Percentage Yield) reflects the true effective annual yield after taking compounding into account.
More in Investments & Wealth
Disclosure: Ankiva One provides free financial calculators and guides. When you apply for products through partner links on our website, we may receive compensation at no extra cost to you. This does not influence our objective calculations.