The Power of Compound Interest: A Simple Guide
Compound interest is one of the most powerful forces in personal finance. Here is how it works and why starting early matters.
The Power of Compound Interest
Compound interest means you earn interest not just on your original principal, but also on the interest that accumulates over time.
The Formula
The future value formula is: FV = P * (1 + r/n)^(n*t)
Where:
- P = Principal (starting amount)
- r = Annual interest rate (as decimal)
- n = Number of times interest compounds per year
- t = Time in years
Why Starting Early Matters
Invest $10,000 at 7% annual return:
| Start age | At age 65 |
|---|---|
| 25 | ~$149,745 |
| 35 | ~$76,123 |
| 45 | ~$38,697 |
The difference between starting at 25 vs. 35 is over $73,000 from the same $10,000 investment.
Try It Yourself
Use our Compound Interest Calculator to model your own scenario.