Compound interest is the closest thing personal finance has to a superpower — and it's badly underrated because its early years look so boring. Here's the math, and why it rewards time more than talent.
Simple vs. Compound
Simple interest pays you on your original money only. Compound interest pays you on your original money plus every dollar of interest you've already earned. Growth goes from a straight line to a curve that keeps steepening.
The Rule of 72
Divide 72 by your annual return to estimate how long money takes to double. At 6%, about 12 years. At 8%, about 9 years. At 3%, 24 years. It's an approximation, but it's accurate enough to do serious planning in your head.
The Tale of Two Investors
Say both earn 7% annually, and both invest $6,000 per year:
- Avery starts at 25, stops contributing entirely at 35 — $60,000 invested.
- Blake starts at 35 and contributes every year until 65 — $180,000 invested.
At 65, Avery has roughly $680,000; Blake has roughly $610,000. Avery invested a third as much and still ends up ahead — because those first ten years of growth got another 30 years to double, and double again.
What This Means Practically
- Time in the market beats timing the market. The biggest input you control is when you start.
- Small rate differences are huge over decades. 1% of extra annual fees consumes roughly a quarter of a portfolio over 40 years.
- Compounding works against you in reverse. Credit card debt at 20% doubles in about 3.5 years by the same math.
Watch contributions snowball over any time horizon
Run Your Own Numbers
Plug in your starting amount, monthly contribution, and a realistic rate — then try shifting the time horizon by five years in each direction. The difference is usually the most persuasive financial chart you'll ever see.