How Does Compound Interest Work? Formula & Examples

Compound interest is the interest you earn not just on your original money but also on the interest it has already earned. Each period the base grows, so returns accelerate over time. The formula for future value is principal multiplied by (1 + rate) raised to the number of periods.

Put another way, FV = P × (1 + r)^n, where P is your starting principal, r is the return per period and n is the number of periods. The exponent is what makes compounding so powerful: each year you earn a return on a slightly larger balance than the year before, and those extra gains then earn returns of their own. This article walks through the mechanics, the three levers that drive it, and how the same maths can work against you. You can run any of these scenarios on our compound interest calculator.

Simple vs compound interest

Simple interest pays only on the original principal. Compound interest pays on principal plus accumulated interest, so the gap between the two widens dramatically the longer you stay invested. This is why compounding is often called the most powerful force in investing.

With simple interest, $10,000 at 7% earns a flat $700 every year — the same amount forever, because the balance it is calculated on never changes. With compound interest the balance itself grows, so each year's 7% is applied to a larger number than the year before. Over a year or two the difference is barely noticeable; over decades it becomes the difference between a modest sum and a transformed one.

Worked example. $10,000 at 7% a year. After 10 years it is about $19,672; after 30 years, about $76,123. Most of that final figure is interest earning interest — the principal was only $10,000. The same $10,000 under simple interest would reach only $31,000 after 30 years, so compounding more than doubles the outcome over that horizon.

The three levers

Three inputs control how much wealth compounding builds: time, the rate of return, and the contributions you keep adding. Understanding which one you can actually influence — and which matters most — is the difference between hoping for growth and engineering it.

Time is the single biggest driver; starting early beats starting big, because the early years are the ones that get compounded over and over. Rate of return is the second lever — even one or two extra percentage points compounds into a large difference over decades, which is why fees and tax drag matter so much. Contributions are the third: adding regularly turns compounding into a wealth-building engine, since every fresh deposit starts its own compounding clock.

It works against you too

The same maths applies to debt. Credit-card balances compound against you, which is why high-interest debt is so corrosive and why paying it down is effectively a guaranteed return.

A balance charged at 20% a year that you never pay down would roughly double in under four years, with the interest itself accruing interest exactly as a savings balance would — only in the lender's favour. Clearing that debt earns you a risk-free 20% return that no investment can reliably match, which is why most value-minded plans prioritise paying off expensive borrowing before chasing market returns.

Written by

Federico Romaldi

Co-Founder, Worthmap

Published: June 6, 2026

Federico is a co-founder of Worthmap, a wealth-intelligence platform built for serious investors. With a background in software engineering and a long-standing passion for value investing, he created Worthmap to bridge the gap between net-worth tracking and investment analysis.