Compound Interest
Nearly every form of financial account has some sort of "interest" associated with it. Loans and credit cards charge interest (bad for you), while savings accounts and investments earn interest (good for you).
The easiest way to describe compound interest is to show an example.
The Power of Starting Early
Three people each save the same amount of money over a 10-year period, but they start at different ages:
- Abby saves from age 25 to 35, then stops but leaves her money invested
- Bobby saves from age 35 to 45, then lets it grow
- Cam saves from age 45 to 55, then lets it grow
All three let their investments grow until age 65. Who ends up with the most?
Adjust the interest rate and contribution amount to see how they affect the outcome.
The Lesson
Even though all three saved the same total amount over 10 years, their final balances are dramatically different. The only difference is when they started.
The difference is time. Starting 10 years earlier nearly doubles your final balance. Starting 20 years earlier can mean almost 4x the wealth.
This is why financial advisors constantly emphasize starting early. Even small amounts invested in your 20s have decades to compound and grow.
Key Takeaways
- Time is your greatest asset — The earlier you start, the more compound interest works in your favor
- Consistency matters — Regular contributions, even small ones, add up dramatically over time
- Don't wait for the "perfect" time — The best time to start investing was yesterday; the second best time is today