Compound interest

Compounding is what happens when your returns start earning returns of their own. It sounds like a small technicality. It is actually the engine behind almost every fortune ever built patiently, and the single best reason to start investing young.

Simple vs compound

Put $1,000 somewhere earning 7% a year in simple interest and you collect $70 every year, forever: after 30 years you have $3,100. Now let it compound instead, each year's earnings staying in and earning alongside the original money. Year one earns $70, year two earns 7% of $1,070, and by year 30 the same $1,000 has become about $7,600. Same money, same rate, more than double the result. All the difference is the earnings staying on the field. These figures are illustrative, not a promise of any particular return.

The rule of 72

There is a quick trick for feeling what compounding does: divide 72 by the yearly rate to estimate how many years a doubling takes. At 7%, money doubles roughly every 10 years. Which means $1,000 invested at 18 could double to $2,000 by about 28, $4,000 by 38, $8,000 by 48 and $16,000 by 58, again purely as an illustration. Notice something strange: the last doubling adds $8,000, more than all the earlier doublings combined. Compounding is slow at first and absurd at the end.

Why the early years matter most

Because the biggest doublings come last, every year you delay chops one off the end, not the beginning. A dollar invested at 18 might double four times by 58. The same dollar invested at 28 only gets three doublings and finishes half the size. That is the entire case for starting early, and it is why small amounts now can beat large amounts later. The topic's case study runs this exact race with twins.

Where you have already met this

You do not have to open an investment account to have compounding working for you, or against you. It is the same force that makes a savings account grow a little faster each year, and the same force that makes a buy now pay later debt or a credit card balance snowball if you let interest pile onto interest. Compounding does not care which direction it runs. Point it at money you own and time is your friend; point it at money you owe and time is quietly against you.

One honest warning: real investment returns are not a smooth 7% a year. Markets deliver good years and bad years in an unpredictable order, and past returns do not predict future ones. Compounding still works across the mess, but it needs time and nerve, not a calculator alone.