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Finance Guide

The Magic of Compound Interest Explained

January 10, 2025 • 4 min read

Albert Einstein reputedly called compound interest the "eighth wonder of the world." He who understands it, earns it; he who doesn't, pays it.

What is Compound Interest?

Simple interest is calculated only on the principal amount. Compound interest, however, is calculated on the principal amount AND the accumulated interest of previous periods.

In simpler terms: Interest on interest.

A Graphical Example

Imagine you invest $10,000 at a 7% annual return.

  • Year 1: You earn $700. Total: $10,700.
  • Year 2: You earn 7% on $10,700 (not just $10,000). That's $749. Total: $11,449.
  • Year 30: That original $10,000 becomes $76,122—without you adding another penny!

Try It Yourself

Use our Compound Interest Calculator to see how your savings could grow.

Time is Your Best Friend

The most critical component of compound interest isn't the interest rate or the principal—it's time.

If you start investing $500/month at age 25, you'll have over $1 million by age 65 (assuming 7% return). If you wait until age 35 to start, you'd need to invest over $1,100/month to hit the same goal.

Conclusion

Start early. Even if it's just $50 a month. The power of compounding means that your earliest dollars work the hardest for you. Use our calculators to plan your path to financial freedom.