See the power of compounding with year-by-year growth projections. Includes regular contributions and tax on interest earnings.
| Item | Amount |
|---|
| Year | Balance | Contributions | Interest |
|---|
Compound interest is interest calculated on both your original principal and all previously accumulated interest. Unlike simple interest (which only ever calculates on the original amount), compound interest means your interest earns interest — producing exponential growth over time. It is the fundamental mechanism behind superannuation growth, long-term investments, and — when working against you — the accumulation of debt.
| Scenario | After 10yr | After 20yr | After 30yr |
|---|---|---|---|
| $20,000 at 7% simple interest | $34,000 | $48,000 | $62,000 |
| $20,000 at 7% compound (annual) | $39,343 | $77,394 | $152,245 |
| $20,000 at 7% compound (monthly) | $40,194 | $80,779 | $162,457 |
| Frequency | $10,000 at 6% for 10 years | Difference vs Annual |
|---|---|---|
| Annual (1×/year) | $17,908 | — |
| Quarterly (4×/year) | $18,061 | +$153 |
| Monthly (12×/year) | $18,194 | +$286 |
| Daily (365×/year) | $18,221 | +$313 |
More frequent compounding produces modestly higher returns at the same nominal rate. The difference matters most over very long periods. In practice, starting 5 years earlier at the same rate produces far greater results than switching from annual to daily compounding.
Divide 72 by the annual interest rate to estimate how many years it takes to double your money. Quick reference:
| Return Rate | Years to Double | Real-World Example |
|---|---|---|
| 3% (low-rate savings) | 24 years | $50k → $100k in 24yr |
| 5% (term deposit, 2026) | 14.4 years | $50k → $100k in ~14yr |
| 7% (balanced super) | 10.3 years | $50k → $100k in ~10yr |
| 9% (growth shares) | 8 years | $50k → $100k in 8yr |
| 12% (high-growth) | 6 years | $50k → $100k in 6yr |
Super is compound interest in its most powerful form. A $50,000 super balance at age 35 with $10,000 in annual contributions at 7.5% net return projects to approximately $1.06 million at age 67. Of that, only $370,000 is contributed — the remaining $690,000 is pure compound growth. Starting 10 years earlier with the same contribution rate adds approximately $700,000 more to the final balance.
What is compound interest in simple terms?
Compound interest is interest that earns interest. When you invest $10,000 and earn $700 in year one, in year two you earn interest on $10,700 — not just $10,000. This snowball effect means compound interest grows exponentially over time rather than in a straight line.
What is the compound interest formula?
A = P × (1 + r/n)^(nt) where A is the final amount, P is the principal, r is the annual interest rate as a decimal, n is the number of times interest compounds per year, and t is time in years. For $10,000 at 6% compounded monthly for 5 years: A = $10,000 × (1 + 0.06/12)^(12×5) = $13,489.
What is the Rule of 72?
Divide 72 by the annual compound interest rate to estimate years to double your money. At 6%, money doubles in approximately 12 years (72 ÷ 6). At 9%, about 8 years. This works as a mental maths shortcut for rates between 4% and 15%.
Is compound interest good or bad?
Compound interest works for you when you are investing or saving, and against you when you are borrowing. Investments and superannuation benefit enormously from compounding over decades. Credit card debt at 20% p.a. compounding monthly is devastating — a $10,000 balance grows to $22,196 in 4 years without payments.
How does compound interest apply to Australian superannuation?
Super funds reinvest all earnings, compounding over your entire working life. The tax advantages inside super (15% earnings tax vs your marginal rate) amplify this effect. Over 30-40 years, most of a typical retiree's super balance consists of investment earnings rather than actual contributions.
What is a realistic compound interest rate for Australian investments?
High-interest savings accounts: 5.0-5.2% (June 2026). Term deposits: 4.5-5.5%. Balanced super funds (long-run average): 6.5-8% net of fees. Australian shares (total return, long-run): 9-10% p.a. Use the rate that matches your actual investment type when modelling.
How often does compound interest apply in Australia?
Australian savings accounts and term deposits typically compound monthly or annually. Most managed funds and super funds calculate and credit earnings annually, though the underlying assets grow daily. More frequent compounding gives modestly higher returns at the same nominal rate.