Understanding Compound Interest

Compound interest is the principle of earning interest not only on your initial investment, but also on the interest that accumulates over time. It's one of the most powerful forces in long-term wealth building.

How Does Compound Interest Work?

When you invest money, you typically earn interest (or returns) over time. With compounding, those returns are reinvested - meaning you start earning “interest on your interest.” Over time, this leads to exponential growth.

The longer you stay invested, the more powerful compounding becomes. Even small, consistent contributions can grow significantly if left to compound over many years.

Example: The Power of Time

If you invest $1,000 at a 7% annual return:

• After 1 year: $1,070
• After 5 years: $1,403
• After 10 years: $1,967
• After 25 years: $5,427

Notice how the growth accelerates over time - that’s compounding in action. Starting early can make a huge difference, even if the amount is small.

What Affects Compound Growth?

• Time: The longer your money compounds, the more powerful the effect.
• Rate of Return: Higher returns lead to faster growth (though often with higher risk).
• Contributions: Regular investments accelerate compounding.
• Reinvestment: Automatically reinvesting dividends and interest boosts compounding.