Compound interest: why starting early beats starting big
Compound interest means earning returns on your past returns. The SEC's example: $730 saved once at 5% grows to $3,155.02 in 30 years — and ten early years can beat thirty later ones.
What compounding actually means
Compound interest means your money earns returns, and then those returns go on earning returns of their own. The U.S. Securities and Exchange Commission puts it plainly: "With compound interest, you earn interest on the money you save and on the interest that money earns."
A simple arithmetic example: $1,000 at 5% a year, with interest calculated once a year. After year one it becomes $1,050; in year two, the 5% applies to $1,050, so the interest is $52.50 and the balance is $1,102.50. That extra $2.50 is the whole idea.
The formula, per Investopedia: future value = P(1+i)^n, and interest = P[(1+i)^n − 1]. For example, a $10,000 loan at 5% over 3 years accrues $1,576.25 in interest.
Small sums, long horizons
The SEC's example: a $2 bottle of soda a day adds up to $730 a year. Save $730 just once and leave it at 5% a year: after 5 years it becomes $931.69, and after 30 years, $3,155.02.
Time does the heavy lifting; the saver only put in $730 once. The 30-year figure is more than four times the starting sum, from a single small deposit left alone.
- $1,000 at 5%$1,050 after 1 year; $1,102.50 after 2 years
- $730 saved once at 5%$931.69 after 5 years; $3,155.02 after 30 years
- Early vs late, at an assumed 7%$50,000 in by age 34: $525,872 at 65; $150,000 in from 35: $472,304 at 65
- Rule of 72At 7%, money doubles in about 10.3 years
Early beats big: the arithmetic
This is a hypothetical illustration, assuming a steady 7% a year. No real investment delivers a constant 7%, and this is not a forecast. Person A saves $5,000 a year from age 25 to 34 — $50,000 in total — and then stops. Person B saves $5,000 a year from age 35 to 64 — $150,000 in total.
At 65, A holds about $525,872; B holds about $472,304. A put in one-third of B's money and still ends ahead, because A's money had ten extra years to compound. The rule of 72 sums it up: divide 72 by the rate to estimate how long money takes to double — at 7%, about 10.3 years.
The same math works in reverse
Debt compounds too: unpaid card balances grow the same way. Interest is charged on interest already owed, so a balance keeps growing even with no new purchases. Fees and inflation also eat into what compounding delivers.
Compounding rewards patience and consistency, not the size of the deposit or the ability to time anything. Starting small right now is the point. This is educational content, not investment advice.
