How Compound Interest Works

Compound interest means interest is added to a balance, so later interest can be earned on both the starting amount and earlier interest. Regular deposits can also grow over time, depending on the rate and when each deposit is made.

Growth on a starting balance $$FV = P \times (1 + r)^n$$

Where: $FV$ = Future Value of savings $P$ = Principal starting balance $r$ = Periodic interest rate $n$ = Number of compounding periods

That formula covers a starting balance with no additional deposits. A savings plan with regular monthly deposits needs an additional contribution term, and its result depends on deposit timing. MoneyPath's savings calculator models deposits at the end of each month and applies an annual rate divided by 12. It does not include account fees, taxes, inflation, or changing rates.

The Rule of 72 The Rule of 72 is a rough mental estimate for how many years a balance might take to double at a steady annual rate: $$\text{Years to Double} \approx \frac{72}{\text{Annual Rate}}$$

At a constant 7% annual rate, the rough estimate is 72 ÷ 7, or about 10 years. Actual savings rates can change, and investment returns are uncertain, so this is not a forecast.

Test compound savings scenarios using the MoneyPath Savings Goal Calculator.