Compound Interest: The Most Powerful Force in Investing
Discover how compound interest works, why Einstein called it the eighth wonder of the world, and how to use it to build wealth.
Compound interest is interest earned on both your initial investment AND previously earned interest. This "interest on interest" causes your money to grow exponentially over time.
The Compound Interest Formula
A = P(1 + r/n)^(nt), where P is principal, r is annual rate, n is compounding frequency per year, and t is years. The more frequently interest compounds, the faster your money grows.
Why Starting Early Matters
Time is more important than amount. Someone who invests $200/month from age 25-35 ($24,000 total) will have MORE at 65 than someone who invests $200/month from age 35-65 ($72,000 total), assuming the same return rate.
Compounding Frequency
- Annually: Interest added once per year
- Monthly: Most common for savings accounts
- Daily: Some high-yield accounts compound daily
- Continuously: Theoretical maximum using e^(rt)
The Rule of 72
Divide 72 by your annual return to estimate how many years until your money doubles. At 8% return, your money doubles every 9 years.