How Compound Interest Works
Compound growth means returns can be earned on the original amount and on previously accumulated returns.
How the math works
Compound interest applies the interest rate to the growing balance each period, not just the original amount, so growth accelerates over time. Adding regular contributions on top of compounding accelerates it further, since each new contribution also starts earning its own interest.
Worked example
$10,000 invested at 7% annually for 20 years grows to about $38,697 with no further contributions. Add just $200/month and the same 20 years produces roughly $142,000 — most of that gain comes from compounding the contributions, not the original $10,000.
What to watch for
- Compounding frequency (monthly vs. annually) changes the effective rate, even at the same stated percentage
- Fees are typically deducted before compounding, which quietly lowers the real growth rate
- The earliest years contribute the least in dollar terms but the most in time for compounding to work
Practical takeaway
Time in the market does more work than most people expect — starting a few years earlier often matters more than adding a larger monthly amount later.