Guide
Compound interest explained simply
Albert Einstein is often credited with calling compound interest the eighth wonder of the world - a quote nobody can actually source - but the idea is truly powerful. It is what makes patient saving work.
Simple vs compound
With simple interest, you earn interest only on your original amount. With compound interest, you earn interest on your original amount and on the interest already earned. $1,000 at 7% simple interest earns $70 every year forever. At 7% compounded annually it earns $70 in year one, $74.90 in year two, $80.14 in year three, and keeps growing. After 30 years the simple balance is $3,100; the compounded one is about $7,612.
Why starting early beats starting big
Imagine two savers who both earn 6% a year. Ava invests $200 a month from age 25 to 35 (ten years) and then stops. Ben waits until 35 and invests $200 a month until 65 (thirty years). Despite putting in three times as much, Ben may end up with less than Ava, because her money had ten extra years to compound. Time is the most valuable ingredient.
The rule of 72
Divide 72 by the annual return to estimate the years to double your money. At 4% it takes about 18 years, at 6% about 12, at 8% about 9. It works in reverse for debt: a credit card charging 24% doubles what you owe in about three years if you only pay the minimum.
What eats your returns
- Fees: A 2% annual fund fee on a 7% return leaves 5% - that can cost you a third of your final balance over decades.
- Inflation: If prices rise 3% a year, a 5% return is really about 2% in buying power.
- Taxes: Tax-advantaged accounts (like a TFSA, RRSP, 401(k), ISA or IRA, depending on your country) can help you keep more.
Making it work for you
Automate a deposit on payday so you never have to decide. Raise it whenever your income rises. Do not panic-sell when markets fall - historically, time in the market has mattered more than timing. Use the calculator to compare scenarios and see how a small change in rate or deposit transforms the result.
General education, not financial advice. Investment returns are not guaranteed.