Simple vs Compound Interest
Simple interest: you earn on your original amount only.
Compound interest: you earn on your original amount plus all interest already earned. Interest earning interest.
$1,000 at 10% for 10 years:
- Simple: $2,000
- Compound: $2,594
The $594 difference comes from interest earning interest. Over longer periods the gap becomes extraordinary.
The Numbers That Change How You Think
$10,000 at 8% annual return. No additional contributions.
- After 10 years: $21,589
- After 20 years: $46,610
- After 30 years: $100,627
- After 40 years: $217,245
In years 1 to 10, you gained $11,589. In years 30 to 40, you gained $116,618 — ten times as much in the same time period. Time did the work.
The Cost of Waiting
Person A invests $10,000 at age 25: $217,245 by age 65. Person B invests $10,000 at age 35: $100,627 by age 65.
The 10-year delay cost $116,618 — more than eleven times the original investment.
Monthly Contributions: The Real Wealth Builder
$200 per month at 8%:
- 10 years: $36,589 (contributed $24,000)
- 20 years: $117,804 (contributed $48,000)
- 30 years: $298,072 (contributed $72,000)
- 40 years: $702,856 (contributed $96,000)
You contributed $96,000. The market gave you $606,856 more.
Compound Interest on Debt
$5,000 credit card at 20% for 10 years: $30,959 owed. Six times the original.
The same force that builds wealth in investments destroys it on debt.
Two Rules
Start as early as possible. Never carry high-interest debt.