Lexicon
Compound Interest
Growth that feeds on its own past growth.
Compound interest is interest calculated not just on the original amount invested but on the interest that has already accumulated from prior periods, so a balance grows at an accelerating rate rather than by the same fixed amount each year.
Simple interest on $1,000 at 7% a year pays a flat $70 every year, forever — $70 in year one, $70 in year thirty. Compound interest at the same rate pays $70 in year one, but in year two it pays 7% of $1,070, not $1,000, and the base it's calculated on keeps growing every year after that. Over a couple of years the difference looks small. Over several decades it becomes the entire story: a sum compounding at 7% roughly doubles every decade, and each doubling starts from a larger base than the last.
Why time matters more than the rate
Because the effect accelerates, the number of years money is left to compound tends to matter more than modest differences in the rate it compounds at. Money invested in your twenties has decades of compounding ahead of it that money invested in your fifties simply doesn't, no matter how the rates compare — which is the main argument for starting early over trying to find a higher return later.
It runs in both directions
Compound interest isn't exclusively a savings phenomenon. Debt compounds the same way. Credit card balances left unpaid accrue interest on interest just as an investment does, which is why persistent high-interest debt can grow into an amount far larger than what was originally borrowed.