Glossary · Investing and personal finance
Compound interest
Compound interest is interest earned on interest: each year’s gain is added to your money, so next year you earn on a bigger sum.
Also called: interest on interest, compounding
9.4% a year to Oct 2026, before inflation (7.1% after).
With dividends reinvested, since Oct 1996. Price alone: $110,095.
In plain words
Put $100 in an account that pays 10% a year. After one year you have $110. In the second year you earn 10% on $110, not on $100, so you get $11 and end with $121. That extra dollar is interest on interest, and it is the whole trick.
With simple interest you would earn the same $10 every year: after 30 years you would have $400. With compound interest the same $100 grows to about $1,745, because each year’s growth is built on everything before it. The curve starts slowly and then shoots up.
Time matters more than anything: the last years add far more than the first ones. That is why money left alone for decades can grow to many times its starting size.
Example
$10,000 left alone at 7% a year
- Year 1: $10,000 × 1.07 = $10,700. Interest: $700.
- Year 10: $10,000 × 1.0710 = $19,672. Interest that year alone: $1,287.
- Year 20: $38,697. Year 30: $76,123.
- Year 40: $149,745. In the 40th year alone the account earns $9,796, almost the whole starting sum.
With simple interest (the $700 taken out every year) you would have only $38,000 after 40 years.
One level deeper
The formula is final amount = start × (1 + rate)years. A quick way to feel it is the rule of 72: divide 72 by the yearly rate to get the years it takes to double. At 6% money doubles in about 12 years; at 9%, in about 8.
Compounding works against you too. Unpaid credit-card debt at 25% a year roughly doubles in three years, and inflation compounds against the value of cash.
In the stock market, compounding comes from reinvesting dividends and from companies growing their profits. Since 1871, US stocks (the S&P 500 and the older index it continues) returned 9.4% a year with dividends reinvested: $1 grew to about $1.19M. Prices alone rose 4.9% a year, and after inflation the return with dividends was 7.1% a year.
Compound vs simple interest: $10,000 at 7% a year
The two lines start together. After 40 years the compound one is almost four times higher, and the whole gap is interest on interest.
The numbers behind the chart
| Date | Compound: interest reinvested | Simple: interest taken out |
|---|---|---|
| Year 0 | $10K | $10K |
| Year 5 | $14K | $13.5K |
| Year 10 | $19.7K | $17K |
| Year 15 | $27.6K | $20.5K |
| Year 20 | $38.7K | $24K |
| Year 25 | $54.3K | $27.5K |
| Year 30 | $76.1K | $31K |
| Year 35 | $107K | $34.5K |
| Year 40 | $150K | $38K |
Why it matters
It is the engine of long-term saving: most of what a retirement account ends with is growth on growth, not money paid in.
It explains why starting early beats saving more later: ten extra years at 7% roughly double the result.
It cuts both ways: debt compounds just as fast, and so do fees and inflation.
A common mistake
Myth: A 7% return means my money grows by 7% of what I put in, every year.
In fact: That is simple interest. With compounding, the 7% applies to a bigger sum every year, so the growth in dollars speeds up: $700 in the first year on a $10,000 start, but $9,796 in the 40th.
Questions people ask
How often is interest compounded?
It depends on the account: yearly, monthly or even daily. More frequent compounding helps a little: 12% a year compounded monthly gives 12.68% over a full year.
What is the rule of 72?
Divide 72 by the interest rate to estimate how many years it takes money to double: 72 ÷ 8 = 9 years at 8%. It works well for rates between about 4% and 15%.
Does compound interest work in the stock market?
Not as a fixed rate, since returns jump around from year to year, but the same arithmetic applies to the average. $10,000 put into the S&P 500 in Oct 1996, with dividends reinvested, was worth about $186,117 by Oct 2026: 10.2% a year. Without reinvesting the dividends it would be about $110,095.
Read more on BigCapital
About the numbers
- The numbers on this page are recalculated from the data every night; the sources are listed at the end of the page.
- S&P Composite price and total return since 1871, and US consumer prices: Robert J. Shiller, Online Data (shillerdata.com); total return with dividends reinvested monthly, calculated by BigCapital.
- This page explains a term. It is not investment advice.