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Compound interest explained

Albert Einstein supposedly called it the eighth wonder of the world. Whether or not he said it, the idea is real: money that earns interest on its interest grows in a way that feels almost unfair once you give it enough time.

Simple vs compound interest

Simple interest pays you only on your original deposit. Compound interest pays you on your deposit and on all the interest you have already earned. Each period your balance is a little bigger, so the next round of interest is bigger too. That feedback loop is the whole trick.

Time matters more than the rate

Because growth compounds, the years you stay invested do more heavy lifting than chasing a slightly higher return. A modest amount invested in your twenties can finish larger than a much bigger amount invested in your forties, simply because it had more time to double and double again.

A worked example

Start with $1,000, add $200 every month, and earn 7% a year for 20 years. You would end with roughly $108,000. Only about $49,000 of that is money you actually deposited; the remaining ~$59,000 is compound growth. Stretch the same plan to 30 years and the gap widens dramatically. Try your own numbers in the compound interest calculator.

How to put it to work

• Start now. The earliest dollars are the most valuable because they compound the longest.
• Automate deposits. Regular contributions add a second engine on top of the growth.
• Leave it alone. Withdrawing interrupts the loop and resets the snowball.
• Mind the frequency. More frequent compounding helps a little, though time and consistency help far more.

The same force can work against you

Compounding is neutral. On savings it builds wealth; on credit card debt it does the opposite, piling interest onto interest until the balance snowballs. The lesson cuts both ways: let it compound for you in savings, and pay down high-interest debt before it compounds against you. To see the cost of borrowing, use the loan calculator.