Compound interest
Interest earned not just on your original deposit, but on the interest that's already been added to it. The engine of long-term wealth.
Compound interest is interest paid on interest. Simple interest only applies to the original principal — invest $1,000 at 7% simple interest for 10 years and you earn $700. Compound interest applies the rate to the growing balance — the same $1,000 compounded annually at 7% for 10 years grows to $1,967.
The longer the time horizon, the bigger compounding's advantage. Over 30 years at 7%, $1,000 becomes $7,612. Over 40 years, $14,974. The growth curve isn't a line — it's a hockey stick. Most of an investment's growth happens in the final third of its life.
This is why starting early matters so much, even with small amounts. $200/month invested at 7% from age 22 to 65 produces a larger nest egg than $400/month invested from age 35 to 65. Time in the market beats amount in the market.
Rule of 72: divide 72 by the annual return rate to estimate how long money takes to double. At 7%, money doubles roughly every 10.3 years.
See also
- Rule of 72 — Divide 72 by an annual return rate to estimate how many years money takes to double. Useful for fast mental math.
- Dollar-cost averaging (DCA) — Investing a fixed amount on a regular schedule — regardless of price — so you buy more shares when prices are low and fewer when high.
- Yield — The income an investment produces, expressed as a percentage of its price. Different from total return — yield is just the income part.
- Savings rate — The percentage of your take-home pay you save or invest each month. The single biggest lever on when you can retire.
Ask Cashowa about compound interest
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