Compound interest is when your money earns interest—and then that interest earns more interest. Over time, this creates a snowball effect that can turn even small investments into serious wealth.

Here’s how it works: When you earn interest on your savings or investments, that interest stays in the account. In the next period, the interest gets added to your balance and begins earning interest itself. The longer you leave it untouched, the faster it grows.

Example:

A $1,000 investment earning 10% per year grows by just over $600 in the first 5 years. But by year 30, that same investment is growing by thousands of dollars every year—even if you never add more money.

The key difference between simple and compound interest is what earns the interest.

Example:

If you invest $1,000 at 5% simple interest for 3 years, you’ll earn $150—just $50 each year.
With compound interest, each year’s interest gets added to your balance, so your earnings grow faster over time.

Simple interest is common with loans and bonds. Compound interest is what powers most savings and investment accounts—and why long-term investing can be so powerful.

To calculate compound interest, you can use this formula:

A = P(1 + R/N)^(N × T)

Here’s what each letter means:

Example:

If you invest $10,000 at 5% interest compounded monthly for 5 years:

A = 10,000(1 + 0.05/12)^(12 × 5) = $12,833.59

That’s nearly $2,834 earned—without adding another dime.

Several types of financial accounts offer compound interest. Each has its own features, risks, and rewards.

1. Savings Accounts

Available at most banks, these accounts pay interest on your balance. The best ones compound daily, helping your money grow faster.

2. Money Market Accounts

Similar to savings accounts but often with higher rates. You can also write checks or use a debit card. However, they may limit monthly withdrawals or charge fees for low balances.

3. Certificates of Deposit (CDs)

CDs lock your money away for a set time (like 6 months or 2 years) in exchange for a fixed interest rate. Interest compounds during that period, and the rate is often higher than regular savings.

4. U.S. Savings Bonds

Government-issued Series EE and Series I bonds earn interest monthly, and that interest compounds every 6 months.

Safety Tip:

Savings, money market accounts, and CDs are typically FDIC-insured, making them very low risk—ideal for conservative savers.

While traditional accounts are safe, certain investments offer higher long-term returns—especially if you reinvest your earnings.

1. Dividend Stocks

These are stocks that pay cash dividends to shareholders. If you reinvest those dividends to buy more shares, your returns compound over time.
Note: Stock prices can drop, so there’s more risk than with savings accounts.

2. Real Estate Investment Trusts (REITs)

REITs pay regular income from rent or property sales. If you reinvest those payouts, you can benefit from compounding while also gaining from real estate appreciation.

These types of investments combine cash flow and growth—both of which can be reinvested to speed up your wealth-building over time.

Compound interest builds wealth slowly at first—then rapidly over time. The key is to start early and stay invested.

Example:

A $1,000 investment earning 10% annually grows by just $983 between years 5 and 10. But from years 25 to 30, it grows by over $7,000—without any new contributions.

The longer your money compounds, the more dramatic the growth becomes. That’s why waiting to invest—even by a few years—can cost you thousands in the long run.

The secret isn’t chasing big wins. It’s consistency, patience, and time.

Compound interest is one of the most powerful tools in building long-term wealth. Whether you’re earning it through a high-yield savings account, a CD, dividend stocks, or REITs, the principle remains the same: let your money earn money—and then let that money earn more.

Compound interest is one of the most powerful tools in building long-term wealth. Whether you’re earning it through a high-yield savings account, a CD, dividend stocks, or REITs, the principle remains the same: let your money earn money—and then let that money earn more.

So whether you’re saving for retirement, a home, or financial freedom, lean into the power of compounding—and give your future self the gift of time.