PakFinanceGuidesCompound interest is growth on top of growth. Here is how it works, why time matters and how to use the rule of 72.
The core idea
Simple interest pays you only on the original amount. Compound interest pays on the original amount and on the interest already earned. Each period the base gets bigger, so the growth gets bigger too.
A plain example
Put $10,000 into an account earning 7% a year. After one year you have $10,700. In year two, you earn 7% on $10,700, not on $10,000, and so on. After ten years the balance is about $19,670, nearly double, without adding a cent.
The rule of 72
To estimate how long money takes to double, divide 72 by the interest rate. At 7% it takes about 10 years. At 4% it takes about 18. At 10% roughly 7. It is a quick mental shortcut, not an exact answer.
Why starting early beats saving more
Two savers invest at the same return. One starts at 25 and stops after ten years. The other starts at 35 and keeps going. The early saver often ends up ahead, because their money had extra decades to compound.
Compounding works against you too
The same mechanism makes debt grow quickly. Credit cards compound against you at high rates, which is why paying them down is often the best guaranteed return available.
How to use it
Automate monthly deposits, keep fees low and stay invested for the long term. Test your own numbers with the compound interest calculator.
General information and education only. Not financial, tax, investment or legal advice. Rules and rates differ by country, so check official sources.