What is compound interest in simple terms?

Compound interest is earning interest on your interest. Your money grows not just from what you originally invested, but from all the accumulated growth over time.

How do I calculate compound interest?

Use the formula: Final = Principal × (1 + rate)^years. For example, $10,000 at 7% for 10 years = $10,000 × (1.07)^10 = $19,672. Online calculators make this easier.

What is the Rule of 72?

Divide 72 by your interest rate to estimate how many years it takes to double your money. At 7% return: 72 ÷ 7 = about 10 years to double.

How does compound interest work in a TFSA?

Inside a TFSA, dividends and capital gains compound completely tax-free. A $7,000 annual TFSA contribution earning 7% grows to roughly $760,000 in 30 years with zero tax on withdrawals. Without the TFSA, you would owe capital gains and dividend tax each year, reducing your effective return by 1–2%.

What hurts compound interest the most?

High fees are the biggest drag on compounding. A 2.0% MER mutual fund vs a 0.20% ETF costs you $160,000+ over 30 years on a $500/month investment. Starting late and withdrawing early also break the compounding chain — the last 10 years produce the most growth.

What Is Compound Interest? $10K Grows to $43K in 30 Years (Canadian Examples)

Simple Explanation

If you want to turn the idea into actual numbers, pair this primer with our compound interest calculator, investment calculator, and guide on how much you should invest per month in Canada. For most beginners, the practical next step after understanding compounding is comparing TFSA vs RRSP for beginners and then following how to start investing.

What Compound Interest Is

Year	Simple Interest (5%)	Compound Interest (5%)
Start	$10,000	$10,000
1	$10,500	$10,500
2	$11,000	$11,025
3	$11,500	$11,576
10	$15,000	$16,289
20	$20,000	$26,533
30	$25,000	$43,219

Simple: Interest only on original amount Compound: Interest on everything accumulated

The Magic of Compounding

Why Time Matters Most

$10,000 at 7%	After Years
10 years	$19,672
20 years	$38,697
30 years	$76,123
40 years	$149,745

Each decade, growth accelerates.

Visual Growth

Year Range	Growth Amount
Years 1-10	+$9,672
Years 11-20	+$19,025
Years 21-30	+$37,426
Years 31-40	+$73,622

Later decades see explosive growth.

The Compound Interest Formula

Basic Formula

A = P × (1 + r)^n

A = Final amount
P = Principal (starting amount)
r = Annual rate (as decimal)
n = Number of years

Example

Variable	Value
P (Principal)	$5,000
r (Rate)	7% = 0.07
n (Years)	20
A = $5,000 × (1.07)^20	$19,348

Rule of 72

Quick Mental Math

To Find	Formula
Years to double	72 ÷ interest rate
Rate needed	72 ÷ years to double

Examples

Return Rate	Years to Double
3%	24 years
5%	14.4 years
7%	10.3 years
10%	7.2 years

Doubling Chain

At 7%	Amount
Start	$10,000
~10 years	$20,000
~20 years	$40,000
~30 years	$80,000
~40 years	$160,000

Regular Contributions

Monthly Additions Matter More

Scenario	After 30 Years
$10,000 one-time at 7%	~$76,000
$200/month at 7%	~$245,000
Both combined	~$321,000

Contribution Impact

Monthly	10 Years	20 Years	30 Years
$100	$17,409	$52,093	$121,997
$300	$52,226	$156,280	$365,991
$500	$87,044	$260,466	$609,985

At 7% annual return

Starting Early vs Late

Age Comparison

Start Age	Monthly	By Age 65
25	$200	~$526,000
35	$200	~$245,000
45	$200	~$105,000

40 years beats 30 years by more than double.

Cost of Waiting

Delay	Missing Out On
5 years	~$180,000
10 years	~$280,000

The most expensive delay is your first year.

Compounding Frequency

How Often Interest Compounds

Frequency	Rate	$10,000 After 1 Year
Annually	5%	$10,500.00
Monthly	5%	$10,511.62
Daily	5%	$10,512.67
Continuous	5%	$10,512.71

More frequent = slightly more growth.

Where It Matters

Investment	Typical Compounding
Savings account	Daily
GICs	Various
Stocks/ETFs	Continuous (growth)
TFSA/RRSP	Depends on holdings

Compound Interest in Canadian Accounts

Where You Get Compounding

Account	Type of Growth
HISA	Interest compounds
GIC	Interest compounds
TFSA (investments)	Returns compound
RRSP (investments)	Returns compound
Stock market	Growth compounds

Tax Sheltering Maximizes Compounding

Account	Tax Impact
TFSA	Growth 100% tax-free
RRSP	Growth tax-deferred
Non-registered	Tax reduces compounding

Compound Interest Works Against You Too

Debt Compounding

Credit Card Debt	At 20% Rate
Start	$5,000
1 year	$6,000
5 years	$12,442
10 years	$30,959

Paying minimum payments allows debt to compound against you.

Lesson

Situation	Priority
High-interest debt	Pay this FIRST
Then invest	Let compound interest work FOR you

Real-World Examples

Example 1: TFSA Investing

Details	Amount
Start age	25
Monthly	$500
Return	7%
At age 65	~$1,315,000

Example 2: Late Start

Details	Amount
Start age	40
Monthly	$500
Return	7%
At age 65	~$400,000

25 years less = $900,000 less wealth.

Example 3: Small Start, Increasing

Period	Monthly Contribution
Age 25-30	$200
Age 30-40	$400
Age 40-65	$600
At 65	~$1,050,000

Start small, increase over time.

Maximizing Compound Interest

Best Practices

Strategy	Why
Start now	Time is irreplaceable
Automate	Consistent contributions
Reinvest dividends	Compound more
Use tax-free accounts	Keep all growth
Stay invested	Don’t interrupt compounding

What Hurts Compounding

Action	Impact
Withdrawing early	Resets growth
High fees	Removes growth
Taxes	Take portion of returns
Waiting to start	Lost time

Compound Interest Calculator

Quick Reference

Monthly	10 Years	20 Years	30 Years
$100	$17K	$52K	$122K
$250	$43K	$130K	$305K
$500	$87K	$260K	$610K
$1,000	$174K	$521K	$1.22M