Compound Interest

Albert Einstein (probably) never called compound interest the eighth wonder of the world. But whoever did had a point. Compound interest is the single most important concept in personal finance -- and it's embarrassingly simple once you get it.

Here's the idea: you earn interest on your interest. That's it. That's the whole thing.

A simple example

You invest $1,000. It earns 7% per year. After year one, you have $1,070. Normal. But in year two, you earn 7% on $1,070 -- not on $1,000. You earn $74.90 instead of $70. The difference is tiny. But give it time.

After 10 years: $1,967. After 20 years: $3,870. After 30 years: $7,612. Your $1,000 became $7,612 without you lifting a finger. The growth isn't linear -- it's exponential. It curves upward. The longer you wait, the steeper the curve gets.

Why time beats amount

Here's what blows people's minds: someone who invests $200/month starting at age 25 will have more money at 65 than someone who invests $400/month starting at age 35. Even though the late starter put in way more cash.

That's because the early starter had ten extra years of compounding. Those first ten years don't look impressive while they're happening -- but they're doing the heavy lifting for the next thirty.

The dark side

Compound interest works both ways. When you owe money, especially on credit cards at 20%+ interest, compounding works against you. That $5,000 credit card balance? If you make minimum payments, you'll pay over $12,000 before it's gone. The math that makes investing magical makes debt devastating.

The takeaway

Start now. Start small. Start imperfectly. The amount matters less than the time. Every month you wait is a month of compounding you'll never get back.