Compound interest
Simple vs compound interest
Simple interest: $1,000 at 7% earns $70 per year, every year. Compound interest: $1,000 at 7% earns $70 the first year, but the next year you earn 7% on $1,070 = $74.90 — and so on. Year by year the gap widens.
Why time matters more than amount
Invest $5,000 once at age 25, leave it alone at 7% real return for 40 years — it grows to roughly $75,000. Invest the same $5,000 at age 45 — by 65 it grows to about $19,000. Same money, same return, four times the result simply because you started 20 years earlier.
Compounding works against you on debt
Credit-card balances compound the same way, but in reverse. A 24% APR balance left alone roughly doubles every three years. This is why credit-card debt is so dangerous: the same compounding force that builds wealth on investments destroys wealth on debt.
Growth of $10,000 invested at 7% real return
A single deposit, untouched. The longer the runway, the more dramatic the curve.
| Years | Value |
|---|---|
| 10 | $19,672 |
| 20 | $38,697 |
| 30 | $76,123 |
| 40 | $149,745 |
| 50 | $294,570 |
Source: Standard compound-interest formula A = P(1+r)^t at r=0.07
