Comp 💡 What is compound interest?
Comp 💡 What is compound interest?
Your investment firm pays you interest on money held in your money market fund. Right now that is around 4%. If you don’t spend that interest, you then earn compound interest, which isinterest that earns interest. You don’t just earn on your original balance (the principal)—you also earn on the interest added along the way. Over time, this creates exponential growth.
📊 How it works (example at 3.5%):
· Year 1: $6,000 grows to $6,210 (same for simple or compound).
· Year 2: Simple interest → $6,420. Compound interest → $6,427.35.
· After 10 years: Simple interest = $8,100. Compound interest = $8,460.
· After 30 years: Simple interest = $12,300. Compound interest = $16,840.
That’s nearly $4,500 more—just by letting your money compound.
⚠️ The flip side:Compounding can hurt you too. Credit card balances often compound, making them harder to pay off. That’s why paying off high-interest debt quickly is so important.
⏳ Why time matters:Start early. Two savers invest $6,000/year until age 67 at 7%:
· Saver who starts at 25 ends with ~$1.5M
· Saver who starts at 30 ends with ~$1M
That 5-year delay cost nearly $450,000!
🔄 Investing regularly helps too:Dollar-cost averaging—investing a set amount regularly—lets you buy more when prices are low and less when prices are high. This helps manage risk and smooths out returns.
🌎 Diversification matters:Don’t put all your eggs in one basket. By spreading investments across many companies or funds, you lower the risk that one bad performer drags you down. That’s why many people use mutual funds, ETFs, or index funds to build diversified portfolios.
✅ The takeaway:Compound interest is a powerful force. When you save and invest wisely, time and consistency can turn modest contributions into life-changing wealth.
Invest early
You might've heard the saying: "It's not about timing the market. It's about time in the market." That's because time fuels the potential power of compounding. Check out another example that illustrates what can happen for retirement savers who start investing early vs. those who wait.
Here's the difference just 5 years can make when it comes to saving for retirement. Two hypothetical savers invest $6,000 at the beginning of each year starting at either age 25 or 30. Each continues until they are 67 and earns an average 7% return. When the saver who started at 25 retires, her account balance is almost $1.5 million. The saver who started at 30? Hers is just over $1 million, or about $450,000 less, despite only investing $30,000 less than the early saver. 📺 Subscribe to our YouTube channel: Financial Literacy for Everyone
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📚 Learn more strategies to make money work for you in our books:
📚 Explore our books here or on Amazon.
Retirement Guidebook
Financial Essentials for Women by Women
Financial Essentials for Couples
Budgeting for Women by Women
Raising Financially Independent Children
Financially Independent Teens
Investing for Financial Independence
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