Albert Einstein reportedly called compound interest the “eighth wonder of the world.” Whether or not he actually said it, the sentiment holds true.
Compound interest is one of the most powerful forces in investing, not because it is flashy or complex, but because it rewards patience, consistency, and time.
At its core, compound interest is interest earned on both your original investment and on the interest that investment has already generated. In other words, your money begins to work on itself. Early on, the effects can seem modest, even disappointing. But over longer periods, compounding accelerates dramatically, turning small, regular contributions into substantial wealth.
Consider a simple example. If you invest $10,000 at a 7% annual return, after one year you’ll have $10,700. That extra $700 then earns interest in the following year, and the process continues. After 10 years, your investment grows to around $19,700. After 20 years, it becomes roughly $38,700. After 30 years, it exceeds $76,000. The most striking point is that the majority of the growth happens toward the end of the period, not the beginning. Time, not effort, does the heavy lifting.
This is why starting early is such a strong advantage. An investor who begins at age 25 and invests $5,000 per year for 10 years, then stops contributing entirely, can still end up with more money at retirement than someone who waits until age 35 and invests the same amount every year for 30 years. The first investor lets compounding work for longer, while the second is forced to rely more heavily on their own contributions. The difference is not discipline or intelligence, but time.
Compound interest also changes how we should think about investing behaviour. Because returns build on themselves, frequent withdrawals, market timing, and emotional decisions can severely reduce long-term outcomes. Missing just a handful of strong market days, or pulling money out during downturns, interrupts the compounding process and can shrink future gains significantly. Consistency often beats cleverness.
Importantly, compound interest works both ways. High-interest debt compounds just as relentlessly as investment returns. Credit cards and personal loans use the same mathematics, but to the borrower’s disadvantage. This is why paying down high-interest debt is often the most effective “investment” someone can make before building a portfolio.
To harness compound interest effectively, three factors matter most: time, rate of return, and consistency. While investors can’t control markets, they can control costs, diversification, and behaviour. Minimising fees, reinvesting dividends, and maintaining a long-term strategy all increase the likelihood that compounding can do its job uninterrupted.
In a world obsessed with quick wins and instant gratification, compound interest is quietly countercultural. It doesn’t promise excitement, only results—slow at first, then surprisingly powerful. For investors willing to be patient, disciplined, and focused on the long term, compound interest remains one of the most reliable tools for building lasting financial security.
If this article has inspired you to think about your unique situation and, more importantly, what you and your family are going through right now, please get in touch with your advice professional.
This information does not consider any person’s objectives, financial situation, or needs. Before making a decision, you should consider whether it is appropriate in light of your particular objectives, financial situation, or needs.
(Feedsy Exclusive)