Compound interest is interest calculated on your original amount plus all the interest that has already been added. That snowball effect is why long-term savers and long-term borrowers see such different outcomes.
Simple vs. compound interest
Simple interest applies only to the principal each period.
Compound interest applies to principal plus accumulated interest.
Quick comparison
$1,000 at 5% simple interest for 3 years earns $150 total. The same rate compounded annually earns about $157.63 because each year’s interest earns interest too.
The Rule of 72
Divide 72 by your annual rate (as a whole number) to estimate years to double your money.
Example
At 6% per year, 72 ÷ 6 ≈ 12 years to double.
It is an estimate, not exact math, but excellent for conversations and quick planning.
Why starting early wins
Investor A saves $200/month from age 25 to 35 and stops. Investor B saves $200/month from 35 to 65. At the same return, A often ends with more despite contributing for fewer years — time in the market matters.
Takeaway
Consistency plus time usually beats waiting for the perfect lump sum.