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Compound interest is what happens when your returns start earning returns of their own. In the early years it looks unremarkable. Given enough time, it becomes the dominant force in your portfolio.
The basic math
Invest $10,000 at a hypothetical 7% annual return. After one year you have $10,700. After ten years, roughly $19,700. After thirty years, about $76,000 — without adding another dollar. Most of that growth arrives in the final decade.
Why starting early matters
Someone who invests $300 a month from 25 to 35 and then stops can end up with more at 65 than someone who invests the same amount from 35 to 65. The early investor simply gave compounding more years to work.
The silent drag: fees
A 1% annual fee sounds small. Over 30 years it can consume a quarter or more of your ending balance. Low-cost index funds keep more of the compounding in your pocket.
“The first rule of compounding: never interrupt it unnecessarily.”
Putting it to work
- Automate monthly contributions.
- Choose diversified, low-cost funds.
- Reinvest dividends.
- Leave it alone through downturns.
Written by
Daniel Reyes
Investing Writer
Daniel translates markets into plain English, with a focus on long-term, low-cost investing for first-time investors.
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