Compound interest means earning interest on top of interest you’ve already earned. The interest that gets added to your balance starts earning interest itself, which makes the balance grow faster the longer it sits. It works both directions — it can help when you’re saving, and hurt when you’re carrying a balance on debt.
A simple example: imagine $1,000 in an account earning 5% interest per year. After year one, you have $1,050. After year two, you earn 5% on $1,050 — not on the original $1,000 — giving you $1,102.50. The gap is tiny in year two, but it widens every year. After 20 years, the same $1,000 has grown to roughly $2,650 without you adding another cent.
The curve is exponential, which is why time matters so much. The early years feel slow, but the gains accelerate. Doubling a balance at 5% takes about 14 years; the next doubling takes another 14 — and now you’re doubling a bigger number. The longer money sits, the more pronounced the effect.
The Rule of 72 is a mental shortcut for estimating how long money takes to double at a given rate: divide 72 by the rate. At 5%, doubling takes about 72 ÷ 5 ≈ 14 years. At 8%, about 9 years. At 2%, about 36. It’s a quick way to see how big a difference a few percentage points make over time.
Compound interest works against you on debt the same way it works for you on savings. A credit card at 24% APR effectively doubles what you owe in about 3 years if you make no payments — the Rule of 72 applies here too. This is why high-interest debt is so urgent: the compounding is running against you every single day.