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Discover the magic of compounding. See how your initial investment grows over time.
Albert Einstein reportedly called compound interest the "eighth wonder of the world," stating:"He who understands it, earns it; he who doesn't, pays it."
Compound interest is the interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods. In simple terms, it's "interest on interest." This phenomenon makes a sum grow at an exponential rate, rather than a linear rate, making it the most powerful tool for building long-term wealth in the stock market or savings accounts.
The frequency at which interest is compounded makes a significant difference to your final balance. The more frequently interest is added to your principal, the faster your money grows.
If you want a quick mental shortcut to understand compounding, use the Rule of 72. Divide the number 72 by your expected annual interest rate, and the result is the number of years it will take for your investment to double.
Example: If you expect an 8% annual return, it will take roughly 9 years for your money to double (72 ÷ 8 = 9).
Is compound interest better than simple interest?
Yes, absolutely! Simple interest only earns money on the initial principal. Compound interest earns money on the principal AND the previously accumulated interest, resulting in massive exponential growth over long periods.
What is a good rate of return?
Historically, the US stock market (S&P 500) has returned an average of about 10% per year before inflation (or 7-8% adjusted for inflation) over the long term. High-yield savings accounts currently offer around 4-5%.
How do monthly contributions help?
Adding small, consistent monthly contributions to your investment portfolio drastically accelerates the compounding effect, turning a modest initial investment into a multi-million dollar portfolio over 30 to 40 years.