What is compound interest? A plain example in VND

Short answer

Compound interest is when interest is added to the principal, so the next period earns interest on that interest too. VND 100 million at 7% a year, compounded yearly, grows to about VND 196.7 million after 10 years; simple interest gives only VND 170 million.

This article is for general information, not financial, investment or legal advice. All figures are rounded illustrations; your situation may differ.

Simple versus compound interest

Simple interest is paid on the original amount only, so every year pays the same. With compound interest, each period’s interest joins the principal, so the base grows and each period pays a little more than the last.

In year one the two are nearly the same. The gap only shows up over time — which is why people say time is compounding’s best friend.

VND 100 million at 7% a year, compounded yearly (rounded)

After	Simple interest	Compound interest
10 years	VND 170 million	VND 196.7 million
20 years	VND 240 million	VND 387.0 million

The rule of 72: how long to double

Divide 72 by the yearly interest rate in percent to get the years it takes to double. At 7%: 72 ÷ 7 ≈ 10.3 years; the exact figure is about 10.2 years. It is a mental shortcut, good for a rough picture only.

How often interest is added matters too

With the same quoted 7% a year, interest added every month works out to about 7.23% a year in practice. When comparing savings products, ask how often interest is added, not just the quoted rate.

Don’t forget inflation

Future money buys less than money today. With 4% average inflation, VND 196.7 million in 10 years buys about what VND 132.9 million buys today. Compounding only makes you better off by the part above inflation.