Compound Interest Explained: The 8th Wonder of the World

Small gains that build on themselves can turn steady habits into big outcomes. Here’s how the classic formula works and how to use it.

The Formula

A = P(1 + r/n)^(n*t)

A is final amount, P is principal, r is annual rate, n is compounds per year, t is years.

Quick Example

Suppose you invest $1,000 at 6% compounded monthly for 5 years. Here P = 1000, r = 0.06, n = 12, t = 5. Plug in and compute A. The result will be higher than simple interest because each period earns interest on previous growth.

What Matters Most

• Time in the market
• Consistent contributions
• Lower fees and taxes where possible

Try It Yourself

Use the Compound Interest Calculator to model scenarios quickly.

Want a deeper dive? Read our full guide here: Compound Interest: The Mathematics of Wealth Building.