Compound Interest, Explained With Numbers You'll Actually Remember

Compound interest is the reason a boring, automatic $200 a month can quietly become a six-figure sum. It is also the reason credit-card debt feels like quicksand. Same math, opposite direction.

The Rule of 72

Divide 72 by your annual return and you get roughly how many years it takes money to double. At 7% that is about 10 years. At 10% it is about 7. At a credit card's 24% it is three years, which is how a $3,000 balance becomes $6,000 if you only ever pay the minimum.

Why the last decade does the heavy lifting

Say you invest $200 a month and earn an average of 7% a year. After 10 years you have about $34,600. After 20 years, about $104,000. After 30, roughly $244,000. After 40, close to $525,000, of which only $96,000 was money you actually put in.

• Years 0 to 10: you did most of the work. $24,000 in, about $34,600 out.
• Years 30 to 40: the money did most of the work. The same $24,000 of contributions added roughly $280,000.

The three levers, ranked

Time beats rate, and rate beats amount. Starting five years earlier usually matters more than squeezing out an extra 1% of return, and both matter more than the exact dollar figure you begin with. Which is why the least glamorous advice, start now, automate it, don't touch it, is also the most profitable.

“Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it.”Popular saying, often (wrongly) attributed to Einstein