Compound interest explained

Compound interest is earning returns on your past returns, not just on the money you put in. Over long periods it does most of the work: invest $500 a month for 30 years at a 7% average annual return and you'll have contributed $180,000 but end with about $610,000. More than two-thirds of the final balance is growth.

The rule of 72

Divide 72 by your annual return to estimate how many years it takes money to double. At 7%, about 10 years. At 10%, about 7. At 4%, about 18. It's a quick way to feel the difference a few percentage points make over a lifetime.

Why starting early matters so much

Compare two savers earning 7% a year:

• Early Emma invests $5,000 a year from age 25 to 35, then stops. Total in: $50,000.
• Late Luke invests $5,000 a year from 35 to 65. Total in: $150,000.

At 65, Emma has roughly $560,000 and Luke about $505,000. Ten years of early contributions beat thirty years of later ones, because Emma's money had three extra decades to compound.

What drives the result

1. Time: the exponent. Each extra decade roughly doubles the end result at 7%.
2. Contributions: the raw material. Early on, how much you add matters more than returns.
3. Return: small differences compound into big gaps. 6% vs. 8% over 40 years is the difference between about 10x and 22x your money.
4. Costs: fees compound too. A 1% annual fee can consume a quarter or more of a portfolio's growth over 30 years, which is why low-cost index funds matter.

Nominal vs. real returns

The US stock market has returned roughly 10% a year nominally over the past century, or about 7% after inflation. Planning in real (after-inflation) terms keeps the numbers in today's dollars, so a future $1 million means what $1 million buys now. The calculators on this site use real returns for that reason.

See your own growth year by year with the compound interest calculator.