Compound interest
Earning returns on your returns, so growth accelerates the longer money is left alone.
Simple interest pays only on your original amount. Compound interest pays on the original plus everything previously earned, so each period starts from a larger base than the last.
The effect is modest early and dramatic late. Most of the final balance in a long-term investment comes from growth on growth rather than from the contributions themselves.
This is why time in the market matters more than the amount invested. A decade of delay cannot be recovered by contributing more later, because the missing years were the ones that would have compounded longest.
The same principle explains why fees matter so much. A percentage taken each year is not a one-off cost — it removes capital that would otherwise have compounded, so the true lifetime cost of a fee far exceeds the sum of the annual charges.
Why starting early wins
$10,000 growing at 7% becomes about $19,700 after ten years, $38,700 after twenty, and $76,100 after thirty. The third decade adds more than the first two combined.
The bit people get wrong
Compounding works against you on debt with equal force. Credit card interest compounding at over 20% grows a balance faster than almost any investment can grow an asset.
Common questions
How do I estimate compounding quickly?
The rule of 72: divide 72 by the annual return to approximate the years to double. At 7%, money roughly doubles every ten years.
Does compounding apply to shares?
Yes, through reinvested dividends and retained earnings growing the business. It is why total return matters more than price movement alone.
What stops compounding working?
Withdrawing returns, high fees, and taxes on income along the way. Each removes capital that would otherwise have kept compounding.
Run your own numbers