Compound Interest
It has been called the eighth wonder of the world — and for good reason. Compounding is the quiet force that turns modest, patient investing into serious wealth. Understand it, and every other decision you make as an investor gets easier.
What is compound interest?
Compound interest is interest earned on interest. When you invest, you earn a return on your capital. If you leave that return invested rather than spending it, next period you earn a return on the original capital and on the return it produced. Repeat this for years and the growth stops being a straight line and becomes a curve that bends steeply upward.
This is the difference between simple and compound growth. Simple interest pays you the same amount every year on your original stake. Compound interest pays you a growing amount, because the base it is calculated on keeps getting bigger. The gap between the two starts small and becomes enormous.
The formula — and what each part does
Two levers dominate the outcome: the rate and, above all, time (the exponent). Because time sits in the exponent, adding years matters far more than it first appears — each additional year compounds everything that came before it.
The snowball, and the inflection point
Picture a snowball rolling downhill. At first it grows slowly — there is barely any surface to gather new snow. But as it grows, each roll picks up more, and the growth becomes self-reinforcing. A compounding portfolio behaves exactly the same way.
Every long-term plan has an inflection point: the moment the portfolio generates more growth from itself than from your new deposits. Before it, your contributions do most of the work. After it, compounding takes the wheel. Reaching that point is the entire game — and the earlier you start, the sooner it arrives.
Early years
The turn
Late years
See it for yourself
Move the sliders. Notice how much of the final number is growth rather than money you put in — and how quickly that share rises as you extend the horizon.
This preview keeps things simple. The full compound interest calculator adds dividend yield, dividend growth, withholding tax, inflation and passive-income milestones — or jump straight to a ready-made scenario.
Why time beats timing — and amount
Two investors, same 8% annual return:
By 65, Ana often finishes ahead of Bruno — despite investing a third as much. Her money simply had more time to compound. That is the whole lesson in one example: the earliest contributions are the most valuable ones you will ever make.
Double compounding: dividends and DRIP
Dividend investors get two compounding engines running at once. First, reinvested dividends buy more shares (a DRIP — Dividend Reinvestment Plan), and more shares pay more dividends. Second, a quality company raises its dividend most years, so the yield on your original cost climbs over time even if the share price does nothing.
The dark side — compounding works against you too
The same force that builds wealth destroys it when it runs in reverse. Understanding both sides is what the Einstein quotation is really about.