Compound Interest
The 8th Wonder of The World
Albert Einstein supposedly called compound interest the “8th wonder of the world.” Whether or not he really said that the idea is powerful enough to change your financial future if you understand it early.
What Is Compound Interest?
Compound interest means you earn interest not only on the money you originally put in (your principal) but also on the interest that money has already earned. Over time, your money grows faster and faster because your earnings start generating their own earnings.
Simple interest: Only pays interest on your original deposit.
Compound interest: Pays interest on both your original deposit and the interest it has already earned.
Why Does It Matter So Much?
The key ingredient in compound interest is time. The earlier you start, the more time your money has to multiply. Even small contributions can turn into big numbers with enough years behind them.
Example: Starting Early vs. Waiting
If you invest $200 a month at age 22 and earn an average of 7% annually, by age 65 you’d have about $520,000
If you wait until age 32 to start, you’d only have about $245,000 less than half even though you invested for 10 fewer years.
That 10-year head start more than doubles your ending balance, even though you invested for fewer years.
Where Do You See Compound Interest?
Savings accounts: Although interest rates are low, they still compound monthly or daily.
Retirement accounts (401k, IRA): Investments grow tax-advantaged, and compounding accelerates the longer you leave them untouched.
Investments (stocks, ETFs, mutual funds): Reinvesting dividends and leaving gains in the market allows your portfolio to compound over decades.
The Rule of 72
Want a quick way to see how fast your money could double? Divide 72 by your expected annual rate of return.
Example: If your money grows at 8% per year, it will double in about 9 years (72 ÷ 8 = 9).
Compound interest rewards time and consistency. You don’t need a massive salary or a financial windfall to build wealth. You just need to start early, invest regularly and let compounding do the heavy lifting.
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