Compound interest: why starting early beats saving more
Compound interest gets called the eighth wonder of the world for a reason that's simple and a little unfair: your interest earns interest.
Simple vs compound
Simple interest pays only on your original money. Compound interest pays on your money and on the interest it already earned — so each period starts from a bigger base, and the balance curves upward instead of climbing in a straight line.
Why starting early wins
Time is the one ingredient you can't buy back. Save $200 a month from age 25 to 35 — then never add another dollar — and by retirement you often end up ahead of someone who saved $200 a month from 35 all the way to 65. Ten years of head start, left alone to compound, out-runs thirty years that started late. The early money simply has more time to double, and double again.
The two dials
- Rate bends the curve steeper — see the Rule of 72.
- Time stretches it out, and stretch matters most, because the largest jumps happen in the final years.
The takeaway
You don't need to be rich to use compounding; you need to start. The most valuable day to begin was years ago. The second most valuable is today.