What is Compound Interest?

Compound interest is what happens when the returns you earn on an investment start generating returns of their own. You earn on your original amount, and then you earn on the earnings too. Over time this creates a snowball effect that accelerates the growth of your wealth.

A simple example

You invest $10,000 and earn 8% in the first year. That gives you $800, bringing your total to $10,800. In the second year you earn 8% again. But now on $10,800, not $10,000. That gives you $864. The year after, you earn on $11,664. And so on. The numbers grow slowly at first, then faster and faster as the base gets larger.

Why does time matter so much?

Because compounding needs time to work. The difference between starting at 25 and starting at 35 is not just 10 years of contributions. It is 10 years of compounding on everything you have already built. The longer your money has to grow, the more dramatic the effect becomes.

What undermines compounding?

Fees and taxes eat into compounding. A fund charging high fees is effectively reducing your compounding rate every year. Withdrawing returns rather than reinvesting them slows the process too. And starting late is the costliest mistake of all. Time lost at the beginning of your investing life cannot easily be recovered later.