Compound Interest: The Eighth Wonder of the World

It’s a concept every investor knows but few truly internalize: Time is more powerful than return.

The Tale of Two Investors

Let’s look at a classic example.

Investor A starts saving $5,000 a year at age 25. They stop saving at age 35. Total contribution: $50,000. Investor B starts saving $5,000 a year at age 35. They continue saving until age 65. Total contribution: $150,000.

Assuming an 8% annual return, who has more money at age 65?

Surprisingly, Investor A comes out ahead, despite contributing $100,000 less than Investor B. This is the magic of compounding. The money invested in those early ten years had three extra decades to grow on itself.

The Rule of 72

A quick mental math trick to estimate compound interest is the Rule of 72. Divide 72 by your expected annual rate of return to find out how many years it will take for your money to double.

• At 6% return: 72 / 6 = 12 years to double.
• At 9% return: 72 / 9 = 8 years to double.

Start Today

The best time to plant a tree was 20 years ago. The second best time is today. Even small amounts invested consistently can grow into a substantial nest egg given enough time.