Compound Interest
Interest earned on both the initial principal and the accumulated interest from previous periods, creating exponential growth over time.
Compound interest is often called the eighth wonder of the world. Unlike simple interest (calculated only on the principal), compound interest generates returns on your returns. The three factors that amplify compounding are: the rate of return, the frequency of compounding, and most importantly, time. Starting to invest even small amounts in your 20s can result in significantly more wealth than larger amounts invested starting in your 40s. This is why financial advisors emphasize starting early — even if you can only invest a modest sum. The flip side is that compound interest works against you with debt, especially high-interest credit cards.
Example
Investing $200/month at 7% annual return: after 10 years you have $34,600 (invested $24,000). After 30 years: $243,900 (invested $72,000). The $170,000+ difference is compound interest.
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Related terms
Dollar-Cost Averaging (DCA)
An investment strategy of regularly investing a fixed amount regardless of market price, reducing the impact of volatility over time.
FIRE (Financial Independence, Retire Early)
A financial movement focused on aggressive saving and investing (often 50–70% of income) to achieve financial independence and the option to retire decades earlier than traditional retirement age.
Savings Rate
The percentage of income saved or invested rather than spent, widely considered the most important factor in building wealth.
Interest Rate
The percentage charged on borrowed money or earned on deposited/invested money, expressed as an annual rate.