Compound Interest Explained: The Most Powerful Wealth Builder
Understand how compound interest works, the Rule of 72, and why starting early beats investing more later.
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Key Takeaways
- 1Compound interest = earning interest on your interest. Time is the biggest lever.
- 2Rule of 72: divide 72 by your return rate to estimate years to double your money.
- 3Starting at 25 vs 35 can mean hundreds of thousands more at retirement.
- 4Fees and taxes erode compounding — keep costs low in index funds.
Einstein reportedly called compound interest the eighth wonder of the world. Whether apocryphal or not, the math is undeniable: money invested early grows exponentially because you earn returns on prior returns.
Model your growth with our compound interest calculator — adjust rate, time, and contributions.
Simple vs Compound Interest
Simple interest earns only on the principal. $10,000 at 7% simple interest earns $700/year forever. Compound interest earns on the growing balance: year 1 = $700, year 2 = $749, year 30 = $76,123 total.
The Rule of 72: at 7% returns, your money doubles roughly every 10.3 years (72 ÷ 7).
The Cost of Waiting
Investor A saves $300/month from age 25 to 35 (10 years, $36,000 total) then stops. Investor B saves $300/month from 35 to 65 (30 years, $108,000 total). At 7% returns, Investor A often ends with more money.
Starting early matters more than saving more later. Open a Roth IRA or increase your 401(k) contributions today.
Maximize Compounding
Keep fees under 0.20% with broad index funds. Reinvest all dividends. Avoid withdrawals that interrupt the compounding chain.
Use DCA via dollar-cost averaging to stay consistent through market swings.
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