What is Compound Interest?
Compound interest is the process of earning interest on both your original investment and on previously earned interest. If you invest $10,000 at 7% annual compound interest, after 10 years you will have approximately $19,672 - nearly double your initial investment. After 30 years, that same $10,000 grows to about $76,123.
The Power of Compounding
The key to compound interest is time. In the first 10 years of a 7% investment, you earn about $9,672 in returns. In years 20 to 30, you earn approximately $37,400 - nearly four times as much. This acceleration is why starting early matters more than investing large amounts later. Monthly compounding produces slightly higher returns than annual compounding because interest begins earning interest sooner.
Key Considerations
Compound interest works against you with debt just as powerfully as it works for you with investments. A credit card balance at 18% APR compounds rapidly if left unpaid. For investors, the two biggest enemies of compounding are fees and interruptions - even small annual fees of 1-2% can reduce final wealth by 30-40% over a 30-year period.