PortioOpen appGuides · By the Portio team ·
How does compound interest work? With a calculator
Compound interest is growth that is added to your money and then grows itself. In the first year you earn on what you put in. In the second you earn on that plus the first year's growth, and so on. The effect is small at the start and large at the end, which is why time matters more than the amount. Type a monthly amount, a yearly rate and a number of years to see it on your own numbers.
- What you put in58%72,000
- Growth42%51,310
300 a month for 20 years is 72,000 put in. Growing 5% a year it becomes 123,310. Start five years later and it ends at 80,187.
Read the full guide
What is the difference between simple and compound growth?
With simple growth you earn the same amount every year, on the money you put in and nothing else. With compound growth, each year's earnings join the pile and earn too.
Take 1,000 growing 5% a year:
| After | Simple | Compound |
|---|---|---|
| 1 year | 1,050 | 1,050 |
| 10 years | 1,500 | 1,629 |
| 20 years | 2,000 | 2,653 |
| 30 years | 2,500 | 4,322 |
For the first few years the two look the same. After thirty, the compound pile is worth far more, and you did nothing extra to get there.
What does a monthly amount become?
Here is 300 set aside every month, growing 5% a year:
| Years | You put in | It becomes | Growth |
|---|---|---|---|
| 10 | 36,000 | 46,585 | 10,585 |
| 20 | 72,000 | 123,310 | 51,310 |
| 30 | 108,000 | 249,678 | 141,678 |
| 40 | 144,000 | 457,806 | 313,806 |
In the first ten years, growth adds about 10,000. In the last ten, it adds over 170,000, on the same 300 a month. After thirty years the growth is larger than everything you paid in.
Why does starting early matter so much?
Because the last years are the valuable ones, and you only get them by starting.
- Starting five years later: 300 a month for 15 years instead of 20 ends at 80,187, not 123,310. You put in 18,000 less and end with 43,123 less.
- Doubling the amount does not buy the time back: 600 a month for 10 years is the same 72,000 put in as 300 for 20 years. It ends at 93,169, about 30,000 lower.
A small amount now beats a larger amount later. If you can only start with a little, start with a little.
What is the rule of 72?
A quick way to see how long money takes to double. Divide 72 by the yearly rate:
| Yearly rate | Doubles in about |
|---|---|
| 2% | 36 years |
| 4% | 18 years |
| 6% | 12 years |
| 8% | 9 years |
It is a rough rule, close enough to compare two options in your head.
Does compounding work against me too?
Yes, and faster. A debt compounds exactly the same way, but usually at a much higher rate. A card at 22% doubles what you owe in a little over three years if nothing is paid.
So the order matters: clear expensive debt first, then let your own money compound. How card interest builds up is explained in how credit card interest works.
What rate should I type?
No one can promise a rate. A savings account pays a known rate that changes over time. Investments have no fixed rate: they can go up or down in any year, and the figures people quote are long averages, not promises.
Use the tool to compare cases, low and high, not to predict a number. The lesson holds at any rate: the amount, the rate and the years all count, and the years are the one you cannot get back.
If you do not take interest, the same math applies to any return that is kept and reinvested, such as a share of profits.
How do I start?
Decide a fixed share of your income and move it on payday, before you spend. The amount matters less than doing it every month. What a reasonable share looks like is in how much of your salary to save.