What is compound interest?
Compound interest is the interest that you earn not only on your original investment, but also on the interest that accumulates as you leave your money invested over time. This differs from simple interest, which is calculated only on the original principal and does not compound.
As an example, imagine that you invest $1,000 for two years and each year it earns 10% with any proceeds being reinvested. In the first year you would earn $100, calculated as $1,000 × 10% = $100. This brings your total investment to $1,100. In the second year you would earn $110 — more than the first year — because $1,100 × 10% = $110. Your total investment value is now $1,210. This compounding effect accelerates the longer you leave your money invested.
Compound interest formula
The formula used to calculate compound interest is:
A = P(1 + r/n)^(nt)
Where:
- A = the future value of the investment (ending value)
- P = the initial principal (starting value)
- r = the annual interest rate (as a decimal)
- n = the number of times interest is compounded per year
- t = the number of years
Worked example
If you invest $10,000 at 6% annual interest compounded monthly for 20 years:
- P = $10,000
- r = 0.06
- n = 12 (monthly compounding)
- t = 20
- A = $10,000 × (1 + 0.06/12)^(12 × 20) = $10,000 × (1.005)^240 = $33,102
Your $10,000 would grow to $33,102 — earning $23,102 in interest, more than double your original investment. With simple interest, you would earn only $12,000 in interest ($10,000 × 6% × 20), ending at $22,000. That’s an $11,102 difference — the power of compounding.
Compound interest growth table
The table below shows how a $10,000 investment grows at various annual returns over different time periods, assuming annual compounding with no additional contributions:
| Years | 4% Return | 6% Return | 8% Return | 10% Return |
|---|---|---|---|---|
| 5 | $12,167 | $13,382 | $14,693 | $16,105 |
| 10 | $14,802 | $17,908 | $21,589 | $25,937 |
| 15 | $18,009 | $23,966 | $31,722 | $41,772 |
| 20 | $21,911 | $32,071 | $46,610 | $67,275 |
| 25 | $26,658 | $42,919 | $68,485 | $108,347 |
| 30 | $32,434 | $57,435 | $100,627 | $174,494 |
| 35 | $39,461 | $76,861 | $147,853 | $281,024 |
| 40 | $48,010 | $102,857 | $217,245 | $452,593 |
Notice how at 10% annual return, your $10,000 turns into more than $450,000 over 40 years — entirely from compound growth. The longer you stay invested, the more dramatic the effect.
The Rule of 72
The Rule of 72 is a quick mental math shortcut to estimate how long it takes to double your money. Simply divide 72 by your annual interest rate:
Years to double = 72 ÷ Annual Rate
| Annual Return | Years to Double |
|---|---|
| 2% | 36 years |
| 4% | 18 years |
| 6% | 12 years |
| 8% | 9 years |
| 10% | 7.2 years |
| 12% | 6 years |
At Canada’s historical average stock market return of roughly 8%–10%, your money doubles approximately every 7–9 years. This is why starting early and staying invested makes such a significant difference.
How compounding frequency affects your returns
Interest can be compounded at different intervals: annually, semi-annually, quarterly, monthly, or daily. The more frequently interest is compounded, the more you earn, because each compounding period adds interest to a slightly larger balance.
| Compounding Frequency | $10,000 at 6% After 10 Years | Total Interest Earned |
|---|---|---|
| Annually (1/year) | $17,908 | $7,908 |
| Semi-annually (2/year) | $18,061 | $8,061 |
| Quarterly (4/year) | $18,140 | $8,140 |
| Monthly (12/year) | $18,194 | $8,194 |
| Daily (365/year) | $18,221 | $8,221 |
In Canada:
- Savings accounts and GICs typically compound interest daily or monthly
- Mortgages are compounded semi-annually by law (Interest Act of Canada)
- Investments (stocks, ETFs, mutual funds) compound based on reinvested returns, which can occur at any frequency
While the difference between monthly and daily compounding is small for savings, choosing monthly compounding over annual compounding on a long-term GIC can earn you hundreds of extra dollars.
Compound interest vs. simple interest
| Feature | Simple Interest | Compound Interest |
|---|---|---|
| Calculated on | Principal only | Principal + accumulated interest |
| Growth pattern | Linear (same amount each year) | Exponential (accelerating) |
| Formula | I = P × r × t | A = P(1 + r/n)^(nt) |
| $10,000 at 6% for 20 years | $22,000 | $33,102 (monthly) |
| Best for | Short-term, simple calculations | Long-term investments |
| Canadian example | Some bonds, certain loans | Savings accounts, GICs, investments |
Over short periods (1–3 years), the difference between simple and compound interest is modest. Over decades, it becomes enormous. Use the simple interest calculator to compare directly.
Does investing become easier after the first $100,000?
It is often said that the first $100,000 is the hardest to reach, with each subsequent $100,000 becoming easier. The reason is the impact that compounding has once you accumulate a significant balance.
Consider an investor contributing $500/month at 8% annual return:
| Milestone | Time to Reach | Cumulative Years |
|---|---|---|
| $0 → $100,000 | ~10 years | 10 |
| $100K → $200K | ~5.5 years | 15.5 |
| $200K → $300K | ~3.8 years | 19.3 |
| $300K → $400K | ~2.9 years | 22.2 |
| $400K → $500K | ~2.3 years | 24.5 |
| $500K → $1M | ~6.5 years | 31 |
The first $100,000 takes a decade, but going from $400K to $500K takes only about 2.3 years. Once the compounding engine has a large base to work with, the returns generated by your existing investments contribute more than your new contributions.
The impact of starting early
The earlier you start investing, the more time compound interest has to work. Even small amounts invested early can outperform larger amounts invested later.
Scenario comparison:
- Investor A starts at age 25, invests $300/month until age 65 (40 years)
- Investor B starts at age 35, invests $500/month until age 65 (30 years)
Both earn 7% annual return:
| Investor A (age 25 start) | Investor B (age 35 start) | |
|---|---|---|
| Monthly contribution | $300 | $500 |
| Total contributed | $144,000 | $180,000 |
| Portfolio at 65 | $745,000 | $567,000 |
Investor A contributes $36,000 less but ends up with $178,000 more — entirely because of 10 extra years of compounding.
How the impact of inflation reduces compound growth
While compound interest grows your money, inflation erodes its purchasing power. If your investments earn 7% but inflation is 2.5%, your real return is approximately 4.5%.
| Nominal Return | Inflation Rate | Real Return | $10,000 After 25 Years (Real Value) |
|---|---|---|---|
| 5% | 2% | ~3% | $20,938 |
| 7% | 2% | ~5% | $33,864 |
| 7% | 3% | ~4% | $26,658 |
| 10% | 3% | ~7% | $54,274 |
This is why earning a return that exceeds inflation is critical for long-term wealth building. Holding cash in a savings account at 2% while inflation runs at 2.5% means you’re actually losing purchasing power over time.
How to use this compound interest calculator
This calculator helps you see how your investment will grow over time with compound interest. You can:
- Enter an initial lump sum to see how it grows over a specific time period
- Add regular contributions (monthly or annually) to model an ongoing savings plan
- Set a target amount and work backwards to see how much you need to invest
- Adjust the inflation rate to see the real purchasing power of your future balance
Experiment with different scenarios to understand how changes in your contribution amount, rate of return, and time horizon affect your outcome.
How to maximize the impact of compound interest
To maximize the power of compound interest on your investments in Canada, use tax-advantaged accounts that prevent your returns from being eroded by annual taxes:
- TFSA (Tax-Free Savings Account) — All growth is completely tax-free. Ideal for any investment you plan to hold long-term.
- RRSP (Registered Retirement Savings Plan) — Contributions are tax-deductible and investments grow tax-deferred until withdrawal. Best when your current tax rate is higher than your expected rate in retirement.
- FHSA (First Home Savings Account) — Contributions are deductible and growth is tax-free when used for a qualifying home purchase. Combines the best features of RRSP and TFSA.
In a taxable account, interest income is taxed annually at your full marginal rate, which reduces the effective compounding. A 6% return in a taxable account at a 30% marginal rate is effectively about 4.2% — significantly less than the full 6% you’d keep in a TFSA.
Even conservative investments like GICs benefit substantially from compound interest when held in registered accounts.
Ready to put compound interest to work?
The best time to start investing is now — the longer your money compounds, the harder it works for you. You can get started with as little as $1 and receive a $25 bonus when you open an account. Follow our step-by-step guide to buying your first ETF and start growing your money today.