
**Compound interest** is often called *the eighth wonder of the world* — and for good reason.  
It’s interest on interest: your balance earns returns, and those returns go on to earn their own returns.  
Over time, the growth curve bends sharply upwards — a snowball effect for your savings and investments.

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## Table of contents
1. [What is compound interest?](#what-is-compound-interest)
2. [The compound interest formula](#the-compound-interest-formula)
3. [Worked example](#worked-example)
4. [Visualising compound growth](#visualising-compound-growth)
5. [Try it with your own numbers](#try-it-with-your-own-numbers)
6. [Common mistakes to avoid](#common-mistakes-to-avoid)
7. [How to maximise compounding](#how-to-maximise-compounding)
8. [The bottom line](#the-bottom-line)
9. [FAQs](#faqs)

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## What is compound interest?

With **simple interest**, you only earn returns on your original deposit.  
With **compound interest**, you earn on both your starting balance *and* the interest already earned.

That’s what makes compounding powerful — it converts time into your biggest ally.  
The longer you stay invested, the faster the growth accelerates, even if your contributions don’t change.

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## The compound interest formula

`FV = P × (1 + r/n)^(n × t)`

Where:

- **FV** – future value (what you’ll have at the end)  
- **P** – starting amount (principal)  
- **r** – annual interest rate (as a decimal, e.g. 6% → 0.06)  
- **n** – number of compounding periods per year (e.g. 12 for monthly)  
- **t** – time in years

Each compounding period adds new earnings to your balance — and the next round of interest is calculated on that bigger amount.

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## Worked example

Say you start with **$5,000**, add **$100 each month**, and earn **6% per year**, compounded monthly, for **10 years**.

| Detail | Value |
|--------|------:|
| Total contributions | $17,000 |
| Final balance | ≈ $23,500 |
| Growth from compounding | ≈ $6,500 |

That extra $6,500 didn’t come from extra deposits — it came from **time and consistency**.

> **Tip:** Regular contributions, even modest ones, matter far more than timing the market.

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## Visualising compound growth

Think of compounding like rolling a snowball down a hill.  
At first, it’s slow and small, but each turn adds more snow and momentum.  
The early years look flat, but later growth dominates — the final stretch often adds more value than all previous years combined.

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## Try it with your own numbers

Use the free [Compound Interest Calculator](/calculators/investment-growth) to project your savings growth.  
Adjust the interest rate, timeframe, and contributions to see how each affects your final balance.

> For a realistic view of **purchasing power**, choose an **after-inflation (“real”) return**.

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## Common mistakes to avoid

- **Ignoring fees:** management or fund costs above 1% can significantly reduce compounding benefits.  
- **Pausing contributions:** missing months breaks the rhythm. Automate transfers to stay consistent.  
- **Chasing high returns:** steady, reliable growth compounds better than volatile bets.

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## How to maximise compounding

- **Start early** – every extra year multiplies results.  
- **Reinvest earnings** – keep dividends or interest in the account.  
- **Increase deposits gradually** – even small annual rises compound strongly.  
- **Stay invested** – time in the market beats timing the market.

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## The bottom line

Compound interest rewards patience and consistency.  
You don’t need a finance degree — just a plan, regular deposits, and time.

Start small, stick with it, and let compounding do the heavy lifting.

> “The best time to start was 20 years ago. The second-best time is today.”

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**Next step:** explore the [Compound Interest Calculator](/calculators/investment-growth) and see how quickly your savings can grow.

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## FAQs

**What is compound interest in simple terms?**  
It’s interest on both your original money and the interest that’s already built up.

**How often is interest compounded in Australia?**  
Usually **monthly** for savings accounts; some investments use quarterly or annual compounding. Check your product disclosure statement for details.

**Is compound interest taxable?**  
Yes. Interest from savings or investments is part of your **assessable income** and taxed at your marginal rate, unless held inside **superannuation**.

**Which is better — monthly or annual compounding?**  
Monthly or quarterly generally yields slightly higher returns, as interest is added more frequently.

**How can I calculate it easily?**  
Use the [Compound Interest Calculator](/calculators/investment-growth). It applies the formula automatically and shows your projected balance.

**Can compounding work against you?**  
Yes. With **debt**, compound interest accelerates what you owe if you don’t make repayments — especially on credit cards. Clear high-interest debts first before focusing on investing.

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*Disclaimer: This article is general information only and does not constitute financial advice. Past performance is not a reliable indicator of future results.*


A plain-English explainer of compound interest with step-by-step examples, the core formula, and a free calculator to test your own numbers.

#investing

Compound Interest Explained: How Your Money Grows (With Examples)