Compound interest is what enables you to take a little bit of money and transform it into a much larger sum over time. Interest is the price financial institutions pay you to use your money; compound interest refers to the way these small but significant payments accumulate (or are compounded) over time.

When your money earns, say, 4 percent interest in a savings account, that is the amount your bank is willing to pay you for the use of your money. The "magic" comes in when you allow that money to grow over time.

A person who at age 30 invests $50 per month at 4 percent interest will have more than $45,000 by the time they turn 65 (That same amount saved without earning interest would only add up to $21,000). Moreover, if that same person started saving at age 20, he or she would have more than $75,000 at age 65.

If either of these individuals were able to earn 10 percent instead of 4 percent, these amounts would increase to more than $189,000 for the person who started at age 30 and $524,000 for the person who started saving at age 20.

• The Securities and Exchange Commission offers a list of calculators, including a link to a savings calculator, to help you explore how compound interest can transform a seemingly small amount of money into a substantial sum over time.

The Rule of 72

One quick way to estimate compound interest is the Rule of 72. In essence, the Rule of 72 estimates how long it takes your money to double in value at different interest rates.

If you have $1,000 in your savings account earning 4 percent interest, you would calculate the time it takes to double your money by dividing 72 by 4 (which equals 18). This means that without adding any more money to your account, it would double in value after 18 years (at 4 percent interest). Using the SEC's compound interest calculator, the actual amount would be $2,051.97 after 18 years - so the rule of 72 provides a fairly close estimate.