Compound interest is InterestInterestThe price a borrower pays to borrow money, and what a saver earns for lending it. Usually given as a percentage per year. calculated not only on the original amount, but also on the interest already added to it. In other words, the interest starts earning interest itself, and over time the amount grows faster and faster.
An example
You put ISK 1,000,000 in an account paying 5% a year and take nothing out.
| After | If the interest is taken out | If the interest builds up |
|---|---|---|
| 1 year | ISK 1,050,000 | ISK 1,050,000 |
| 10 years | ISK 1,500,000 | ISK 1,628,895 |
| 20 years | ISK 2,000,000 | ISK 2,653,298 |
| 30 years | ISK 2,500,000 | ISK 4,321,942 |
The example ignores tax and inflation. Interest above the tax-free allowance is taxed at 22% as capital income, and if inflation is 5% a year, the amount only just keeps up with prices. What matters most is therefore the real returnReal interest rateThe interest rate minus inflation. Real interest shows whether savings are really growing in value or shrinking, even as the number of krónur rises..
The rule of 72
A rough way to estimate how long it takes to double an amount is to divide 72 by the interest rate. At 6% an amount doubles in about 12 years, and at 3% in about 24 years.
Compounding works against you too
The same rule applies to debt. If an overdraft or credit card balance isn't paid down, the interest is added to the debt, and it grows faster and faster. At high rates, a debt can double in a few years.
Compounding is also why time matters so much in saving. Starting early gives your returns longer to grow. That applies to any ReturnReturnWhat an asset earns its owner, in interest, dividends or price rises. Usually given as a percentage of the amount originally invested., not just interest: dividends that are reinvested grow the same way.
Compound interest and crypto
Bitcoin pays no interest, so compounding doesn't apply to it in the same way. Its owners see it rather as savings that can't be diluted, because nobody can increase the supply. Some DeFi services advertise a high annual percentage yield (APY)Supply APYThe return you earn for depositing crypto in a DeFi lending service. It comes from the interest borrowers pay and it varies., which is calculated with compounding. High yields usually come with high risk, though.
Everything in Myntkaup Learn is written and regularly reviewed by the Myntkaup editorial team. It is for education and is not investment advice. Editorial policy. Updated 2 November 2026.