Compound interest explained: why starting early beats starting big

Compounding means earning returns on your past returns. In the first years it’s barely noticeable. Given enough time, it becomes the biggest part of your wealth.

A simple example

Invest 1,000 and earn 7% a year, reinvesting everything:

In the first decade the money roughly doubles. In the third decade alone it grows by almost 3,750 — more than three times what you put in. That’s compounding at work.

The rule of 72

A quick mental shortcut: divide 72 by the yearly return to estimate how long it takes your money to double.

• At 6% a year: about 12 years.
• At 8% a year: about 9 years.
• At 2% a year (or 2% lost to fees every year): about 36 years.

It works the other way too: inflation and fees also compound against you.

Starting early beats starting big

Two investors, both earning 7% a year:

• Ana invests 100 a month from age 25 to 35, then stops. Total paid in: 12,000.
• Mihai invests 100 a month from age 35 to 65. Total paid in: 36,000.

At 65, Ana has about 140,000 and Mihai about 122,000. Ana ends up with more despite paying in a third as much, because her money had 10 more years to compound. Try your own numbers in our compound interest calculator.

What compounding needs

1. Time — the most powerful ingredient.
2. Reinvested returns — dividends and gains put back to work (an accumulating ETF does this for you).
3. Low costs — fees compound against you every year.
4. Patience — selling in a panic resets the clock.

The short version

Start as early as you can, even with small amounts, keep costs low, and leave the money alone. Time does the heavy lifting.