What is Compound Interest?
Compound interest is interest earned on both your original investment (principal) AND all the interest you've previously earned. It's the snowball effect for your money—the longer it rolls, the bigger it gets.
The Key Insight
In Year 1, you earn interest on $10,000. In Year 10, you're earning interest on $21,589. Same rate, but much bigger numbers. That's the power of compounding.
Simple Interest vs Compound Interest
The difference between simple and compound interest becomes dramatic over time. Here's what $10,000 at 8% looks like over 30 years:
The Rule of 72
Want to know how long until your money doubles? Just divide 72 by your interest rate. It's surprisingly accurate and incredibly useful for quick mental math.
The Rule of 72
At the stock market's historical ~10% average return, your money doubles roughly every 7 years. That means $10,000 invested at age 25 becomes $160,000 by age 60—even if you never add another dollar.
Why Starting Early Wins
Time is the most powerful factor in compound interest. Starting 10 years earlier can mean hundreds of thousands more—even with smaller contributions.
Invests $300/month for only 10 years
Then stops and lets it grow until age 65
Total invested: $36,000
Invests $300/month for 30 years
Contributes the entire time until age 65
Total invested: $108,000
The Harsh Math
Emma invested 3× LESS money but ended up with nearly 2× MORE. Those extra 10 years of compounding made all the difference. The best time to start investing was yesterday. The second best time is today.
Strategies to Maximize Compounding
1. Start Now, Not Later
Every year you delay costs you significantly. Even small amounts today beat larger amounts tomorrow. The calculator above proves it—try different scenarios.
2. Reinvest All Returns
Dividends and interest should be reinvested, not spent. Turn on automatic dividend reinvestment (DRIP) to keep the compounding machine running. Learn more in our dividend growth investing guide.
3. Be Consistent
Regular contributions through dollar-cost averaging build wealth steadily. Set up automatic investments—you'll be amazed how fast they grow.
4. Minimize Fees
A 1% annual fee might seem small, but over 30 years it can cost you 25% of your final portfolio. Choose low-cost index funds—the Bogleheads 3-fund portfolio is a great starting point.
5. Use Tax-Advantaged Accounts
ISAs (UK), 401(k)s and IRAs (US), or TFSAs (Canada) let your investments compound tax-free. That means more of your returns stay invested. See our UK ISA guide for tax-free investing strategies.
Frequently Asked Questions
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