The idea
With simple interest, you earn on your starting amount only. With compound interest, each period’s interest is added to the balance, so the next period earns on the bigger amount.
Example: a lump sum
5,000 at 7% a year for 15 years, with no extra saving, grows to about 14,245.
Example: saving every month
Add 200 a month to that 5,000 at the same 7% and the result after each period looks like this:
- 10 years: about 44,665 (you put in 29,000)
- 15 years: about 77,637 (you put in 41,000)
- 20 years: about 124,379 (you put in 53,000)
- 30 years: about 284,577 (you put in 77,000)
Why time beats amount
Saving 200 a month for 30 years gives about 243,994. Saving the same for 20 years gives about 104,185. The extra ten years added far more than the 24,000 in extra deposits.
Things that reduce the result
- Fees on investments
- Taxes on gains
- Inflation, which lowers what the money can buy
- Returns that vary year to year rather than staying at 7%
Plan with your own figures
Use the compound interest calculator with a cautious return, and test a lower rate to see the effect. Results are estimates, not promises, and this is not financial advice.