Compound Interest Explained: The Eighth Wonder of the World

"The Eighth Wonder of the World"

Albert Einstein reportedly called compound interest "the eighth wonder of the world" and said: "He who understands it, earns it; he who doesn't, pays it."

Whether Einstein actually said this is debatable, but the wisdom is undeniable. Compound interest is the engine that powers the FIRE movement.

Simple vs. Compound Interest

Simple Interest

You earn interest only on your original principal.

Year 1: $1,000 + 10% = $1,100
Year 2: $1,100 + 10% × $1,000 = $1,200
Year 3: $1,200 + 10% × $1,000 = $1,300

After 30 years: $4,000

Compound Interest

You earn interest on your principal and on previously earned interest.

Year 1: $1,000 + 10% = $1,100
Year 2: $1,100 + 10% = $1,210
Year 3: $1,210 + 10% = $1,331

After 30 years: $17,449

That's over 4× more than simple interest!

The Three Levers of Compound Growth

1. Money (Principal)

The more you invest, the more it compounds. A $10,000 initial investment at 7% for 30 years becomes $76,123.

2. Time

This is the most powerful lever. The difference between starting at 25 vs. 35 is massive:

Starting Age	Monthly Investment	Value at 65 (7% return)
25	$500	$1,200,000
35	$500	$567,000
45	$500	$246,000

Starting 10 years earlier more than doubles your retirement savings.

3. Rate of Return

Higher returns accelerate growth dramatically:

Rate	$500/month for 30 years
5%	$416,000
7%	$610,000
10%	$1,086,000

The Rule of 72

A quick way to estimate how long it takes your money to double:

Years to Double = 72 ÷ Annual Return Rate

Return Rate	Years to Double
4%	18 years
6%	12 years
7%	~10.3 years
10%	7.2 years
12%	6 years

Start Early, Be Consistent

The single most important factor in compound growth is time. Every year you delay is a year of compound growth you can never get back.

"Someone's sitting in the shade today because someone planted a tree a long time ago." — Warren Buffett

Use our Compound Interest Calculator to see how your money can grow over time.