Compound interest is simply interest earned on interest. It sounds small when you say it that way — but over long stretches of time, that small difference compounds into something genuinely large.
Simple interest vs. compound interest
With simple interest, you earn a fixed amount each period based only on your original balance. With compound interest, each period's interest is calculated on the original balance plus all previously earned interest. That earned interest starts earning its own interest.
A concrete example
| Year | Balance at 7% simple interest | Balance at 7% compound interest |
|---|---|---|
| 1 | $1,070 | $1,070 |
| 10 | $1,700 | $1,967 |
| 20 | $2,400 | $3,870 |
| 30 | $3,100 | $7,612 |
Starting from the same $1,000 at the same 7% rate, the gap between simple and compound growth barely shows up in year one — and becomes dramatic by year thirty. This example uses a fixed, illustrative rate; real investment returns vary year to year.
Why time matters more than the amount
Because compounding accelerates over time, starting early tends to matter more than starting big. Someone who invests smaller amounts for a longer period will often end up ahead of someone who invests larger amounts but starts a decade later, purely because of how many compounding periods each person gets.
This works in reverse too
Compound interest applies to debt as well as savings. Credit card balances that aren't paid off in full compound against you in exactly the same way they compound in your favor when saving.
The math doesn't require a finance degree — it requires patience, and an understanding that the effect is genuinely slow at first and genuinely fast later on.
About the author
Daniel Osei
Business & Finance Correspondent
11 pieces published
