Compound Interest: The 8th Wonder, Explained Simply
The single most important idea in personal finance, in one short read — with the numbers to prove it.
Simple interest earns money on your original deposit. Compound interest earns money on your original deposit and on all the interest it has previously earned. Given enough time, the second one absolutely dwarfs the first.
The one chart to remember
£200 a month, invested from age 25 to 65 at a 7% real return, becomes around £525,000. Wait until 35 to start and the same £200/month becomes only about £244,000. Ten years of delay costs more than the next thirty.
The rule of 72
Divide 72 by your annual return to get the doubling time. At 6% money doubles every 12 years. At 9%, every 8 years. That's why long-term investors care about the return, not the year-to-year noise.
What actually compounds
- Index funds and ETFs, with reinvested dividends.
- Interest inside a cash ISA or savings account, if not withdrawn.
- Pension contributions, boosted by employer match and tax relief.
Two things kill compounding: withdrawing early, and high fees. A 1.5% annual fee doesn't sound like much — over 40 years, it can eat a third of your final balance.