The power of compounding
Compound Interest Charts
A plain-language look at how compounding can build over time.
Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it.
Albert Einstein (attributed)
What is compound interest?
Compound interest is interest calculated on the original amount and on the interest that has already accumulated. It is often described as growth building on prior growth.
In a FinTech context, automated tools can help people visualize scenarios and understand how time, rate, and starting amount may affect a hypothetical outcome.
A hypothetical example
The examples on this page are for educational purposes only. They are not investment advice, do not represent a recommendation, and do not guarantee any result. Market conditions, fees, taxes, inflation, timing, and individual circumstances can materially change outcomes.
Past performance does not predict future results. Any financial decision should be considered carefully with qualified professionals.
Continue the example
In our first example, the sum of $5,000 grows by 8% per month using compound interest for six years.
$5,000 × 1.08 = $5,400 in month one. If the equal-sign button on a calculator is pressed again, it produces month two; press it again for month three, and so on. At the end of year one, the same $5,000 would be $12,590.
This concept can also illustrate exponential growth: small sums can turn into large totals when they have enough years to grow.
It may be easier to visualize this by viewing a six-year compound-interest chart.
| Original | $5,000 | $10,000 | $15,000 | $25,000 |
|---|---|---|---|---|
| Year 1 | $12,590 | $25,182 | $37,722 | $62,954 |
| Year 2 | $31,705 | $63,411 | $95,117 | $158,529 |
| Year 3 | $79,840 | $159,681 | $239,671 | $399,204 |
| Year 4 | $201,052 | $402,105 | $603,583 | $1,005,264 |
| Year 5 | $506,285 | $1,012,570 | $1,519,802 | $2,531,426 |
| Year 6 | $1,274,912 | $2,549,825 | $3,827,121 | $6,374,562 |
Because this example is for educational purposes only, it does not calculate variables such as inflation rates, tax rates, or deductions. Consult a qualified legal or financial professional about your specific plans and goals.
The examples on this page are for educational purposes only. They are not investment advice, do not represent a recommendation, and do not guarantee any result. Market conditions, fees, taxes, inflation, timing, and individual circumstances can materially change outcomes.