What is compound interest?
The mathematical engine that multiplies wealth and rewards long-term patience.
Introduction
Compound interest occurs when earnings generated by an investment are reinvested rather than withdrawn. Over time, subsequent returns calculate not only on your original principal, but also on all accumulated interest, creating an exponential growth hockey stick.
Key Concepts
Simple vs. Compound Interest
With simple interest, gains are withdrawn and capital grows linearly. With compound interest, money behaves like a snowball rolling down a snowy hill, expanding exponentially.
The 4 decisive factors
Compound growth outcomes depend on:
- 1. Initial capital: Starting lump sum.
- 2. Monthly contribution: Disciplined additions.
- 3. Annual return (%): Average annualized portfolio growth.
- 4. Time (Years): The supreme multiplier. Doubling time can 5x to 10x total final wealth.
Watch a single initial deposit compound across decades:
$10,000
$11,000
$16,105
$25,937
$67,275
$174,494
Between Year 10 and Year 30, compounding produces over 90% of total wealth.
Evolution of $10,000 at 10% with $500/mo contributions
| Horizon | Total Out-of-Pocket Contributed | Returns Generated | Total Wealth |
|---|---|---|---|
| 5 Years | $40,000 | $14,100 | $54,100 |
| 10 Years | $70,000 | $58,700 | $128,700 |
| 20 Years | $130,000 | $345,200 | $475,200 |
| 30 Years | $190,000 | $1,378,500 | $1,568,500 |
- Time is your greatest asset: starting 5 years earlier can double your retirement nest egg.
- Over long horizons, returns generated far exceed total cash contributed out of pocket.
- Automatic dividend and return reinvestment is mandatory to trigger the growth curve.
Calculate your personalized scenario
Compound Interest Calculator
Visualize how time and exponential returns multiply your initial capital
$578.2K
$208.4K
$369.8K
In 20 years you could accumulate $578,202.
Frequently Asked Questions
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