Albert Einstein may or may not have called compound interest the eighth wonder of the world — but whoever said it was onto something. Compound interest is the single most powerful force in personal finance, and it works in your favour when you save and against you when you carry debt. Understanding it takes minutes; applying it well can mean hundreds of thousands of dollars over a lifetime.
Use our compound interest calculator to model exactly how your savings grow over time — adjust the rate, frequency, and contribution amount to see the snowball effect for yourself.
Simple vs compound interest: the key difference
Simple interest is calculated only on your original deposit (the principal). If you deposit $10,000 at 5% simple interest for 10 years, you earn $500/year × 10 = $5,000 total interest.
Compound interest is calculated on your balance including previously earned interest. Each interest payment is added to your balance, and future interest is calculated on that larger number. The same $10,000 at 5% compounded annually for 10 years produces $6,289 in interest — $1,289 more than simple interest, from the same deposit, just from interest earning interest.
How compound interest works: a step-by-step example
Starting with $10,000 at 5% interest, compounded annually:
| Year | Starting Balance | Interest Earned | Ending Balance |
|---|---|---|---|
| 1 | $10,000 | $500 | $10,500 |
| 2 | $10,500 | $525 | $11,025 |
| 5 | $12,763 | $638 | $13,401 |
| 10 | $15,513 | $776 | $16,289 |
| 20 | $25,270 | $1,264 | $26,533 |
| 30 | $41,161 | $2,058 | $43,219 |
Notice how the interest earned per year grows from $500 in year 1 to over $2,000 in year 30 — even though the rate never changed. That's the power of compounding: time amplifies everything.
The compounding frequency effect
Interest can be compounded at different intervals — annually, semi-annually, monthly, or daily. More frequent compounding produces slightly more interest because you're earning interest on your interest sooner.
| Compounding Frequency | $10,000 at 5% over 10 years |
|---|---|
| Annually | $16,289 |
| Semi-annually | $16,386 |
| Monthly | $16,470 |
| Daily | $16,487 |
For most savings products, the difference between monthly and daily compounding is small. The frequency matters more at higher balances and longer timeframes. Note that Canadian mortgages are compounded semi-annually by law — a unique feature explained in our semi-annual compounding guide.
The Rule of 72: doubling your money
The Rule of 72 is a handy shortcut to estimate how long it takes to double your money at a given interest rate:
Years to double = 72 ÷ Annual interest rate
At 6%: 72 ÷ 6 = 12 years to double. At 9%: 72 ÷ 9 = 8 years.
| Annual Return | Years to Double | $50,000 becomes after 30 years |
|---|---|---|
| 3% | 24 years | $121,363 |
| 5% | 14.4 years | $216,097 |
| 7% | 10.3 years | $380,613 |
| 9% | 8 years | $663,384 |
Compound interest in Canadian accounts
TFSA and RRSP
Both accounts let your investments compound completely tax-sheltered — which is the most powerful version of compounding available to Canadians. Inside a TFSA, you're not paying annual tax on interest or capital gains, so the full amount compounds year over year. Over 30 years, the difference between taxable and tax-free compounding at the same rate is enormous.
GICs
Guaranteed Investment Certificates (GICs) use compound interest and are one of the safest ways to earn it. A 5-year GIC at 4.5% compounded annually on $20,000 produces $24,924 at maturity — a guaranteed $4,924 in interest. See our GIC guide for more detail.
High-interest savings accounts
Canadian HISAs typically compound interest daily or monthly. Even at modest rates, the daily compounding on a large emergency fund balance adds up over time.
Compound interest working against you: debt
The same mechanism that builds wealth in savings accounts destroys it in debt. Canadian credit cards typically charge 19.99–22.99% interest, compounded daily or monthly. A $5,000 balance at 20% with minimum payments can take over 10 years to pay off and cost nearly $8,000 in interest alone — far more than the original debt.
This is why paying off high-interest debt before investing in a TFSA or GIC almost always makes mathematical sense — the guaranteed "return" of avoiding 20% interest beats any savings rate available.
See your savings grow with compound interest
Enter your starting balance, monthly contribution, rate, and time horizon to see exactly how compound interest builds your wealth over time.
→ Calculate My Compound GrowthFrequently asked questions
What is compound interest in simple terms?
Compound interest means you earn interest on your interest, not just your original deposit. Every time interest is added to your balance, that new (larger) balance becomes the base for your next interest calculation. Over time this creates an accelerating snowball — the longer you leave it, the faster it grows.
Is compound interest better than simple interest?
For savings, yes — compound interest produces more money than simple interest at the same rate over the same time. The longer the period, the bigger the advantage. For debt, compound interest works against you, so you want to pay debt off quickly before compounding amplifies what you owe.
How is interest compounded on Canadian GICs?
GIC compounding frequency varies by product. Many 1–5 year GICs compound annually, while others offer semi-annual or monthly compounding. Some GICs pay interest monthly to your account rather than compounding it — this is useful if you need regular income but produces slightly less total interest than compounding.
How much does $10,000 grow with compound interest over 20 years?
It depends on the rate. At 4% annually: $21,911. At 6%: $32,071. At 8%: $46,610. At 10%: $67,275. The difference in a few percentage points of return is staggering over 20 years — which is why keeping investment fees low matters enormously for long-term outcomes.