Final balance
| Year | Interest earned | Total contributed | Balance | Growth vs principal |
|---|
The power of compound interest
Compound interest is interest calculated on both your initial principal and all previously accumulated interest. Unlike simple interest, which grows linearly, compound interest grows exponentially — the longer the time period, the more dramatic the effect. This is why starting early is the most powerful financial decision most people will ever make.
The mathematics are striking. $10,000 invested at 7% annually: after 10 years it's $19,672. After 20 years, $38,697. After 30 years, $76,123 — 7.6 times the original investment. The growth in years 20–30 alone ($37,426) is nearly four times the entire first decade's growth ($9,672). This exponential acceleration is the snowball effect in action.
Monthly contributions dramatically amplify the effect. Adding $200 per month to the $10,000 above at 7% for 30 years produces approximately $283,000 — the contributions total $72,000, and compound interest generates the remaining $201,000. More than two-thirds of the final balance is pure compounding.
The compounding frequency matters less than most people expect. The difference between monthly and daily compounding on a $10,000 investment over 10 years at 5% is only about $17. What matters enormously are the interest rate, the time horizon, and whether you add regular contributions. Starting 5 years earlier typically produces more wealth than increasing your contribution by 30%.