Investing · 5 min read
Compound Interest Explained: The 8th Wonder of the World
Understand how compound interest grows your money, why starting early matters, and how to calculate it with examples.
What is compound interest?
Compound interest is interest earned on interest. When you save or invest, your earnings are reinvested and begin generating their own earnings. Over long periods, this creates exponential growth. Albert Einstein reportedly called it the eighth wonder of the world.
The compound interest formula
The future value of an investment is A = P(1 + r/n)^(nt). P is the principal, r is the annual rate, n is how often interest compounds per year, and t is time in years. The more frequently interest compounds, the faster money grows. Most investments compound annually or monthly.
Why starting early matters
Time is the most important ingredient. A 25-year-old who invests $5,000 per year for 10 years and then stops will often end up with more money at 65 than someone who starts at 35 and invests $5,000 per year for 30 years. The early starter gets more years of compounding.
Action step
Use the compound interest calculator to see how much your savings could grow. Try changing the starting age, monthly contribution, and rate of return to see the impact of time.