The 8th Wonder of the World
Albert Einstein reportedly called compound interest the "8th wonder of the world," stating: "He who understands it, earns it; he who doesn't, pays it."
Unlike simple interest (where you only earn interest on your initial deposit), compound interest allows you to earn interest on the interest you've already accumulated. Over long periods, this creates an exponential growth curve that can turn average savers into millionaires.
The Rule of 72
The "Rule of 72" is a quick mental math trick to figure out how long it will take for your money to double at a given interest rate. Simply divide 72 by your expected annual interest rate.
Example: If you expect an 8% annual return, 72 ÷ 8 = 9 years. Your money will double every 9 years!
Why Start Early?
Time is the most important factor in compound interest. A person who starts investing $200 a month at age 25 will have significantly more money at age 65 than someone who starts investing $400 a month at age 35, assuming the same rate of return. The longer your money has to compound, the less you actually need to contribute out of your own pocket.