Compound growth: money that grows on itself
Why starting early matters more than starting big.
Growth on top of growth
When your money earns a return, that return gets added to your balance. Next year you earn a return on the bigger balance, including last year's gains. That is compound growth: growth on top of growth.
Think of a snowball rolling downhill. At first it picks up a little snow. As it gets bigger, each turn picks up more, because there is more surface to stick to.
Time does the heavy lifting
In the early years compounding looks boring. The magic shows up later, because the base you are growing keeps getting bigger. That is why time is often more powerful than the amount you start with.
A handy shortcut is the Rule of 72: divide 72 by the yearly growth rate to estimate how many years it takes money to double. At 6% a year, that is about 12 years. At 9%, about 8 years. It is an approximation, not an exact answer.
The honest fine print
Real investments do not grow by a neat, fixed percentage every year. Some years are up a lot, some are down. The numbers in this lesson are illustrative averages to show the idea, not a promise. Compounding also works against you with debt: credit card interest compounds too.
Year 1: $100 earns $7, so you have $107. Year 2: you earn 7% of $107, which is $7.49, so you have $114.49.
Keep going and after 10 years you have about $197. After 20 years, about $387. After 30 years, about $761.
Notice the pattern: the first 10 years add about $97, but the last 10 years (from year 20 to 30) add about $374. Same rate, same starting $100. The difference is the bigger base.
Key terms
- Compound growth
- Earning returns on both your original money and the returns it has already earned.
- Rule of 72
- A quick estimate: 72 divided by the yearly growth rate is roughly the number of years for money to double.
- Return
- How much an investment gains or loses, usually shown as a percentage per year.
Compounding rewards time, so starting early, even small, can beat starting big later.