Compound interest
Returns earning returns. The engine of every long-term outcome.
Simple interest pays only on your original stake. Compound interest pays on the stake and on all the interest already earned, so the growth curve bends upward rather than running straight.
It is exponential, and human intuition is linear, which is why almost everyone underestimates it. The last decade of a thirty-year investment typically produces more growth than the first twenty combined.
Future value = P × (1 + r)^nWhat a 2% fee costs over thirty years
Both lines earn the same 8%. One pays 0.07% a year, the other pays 2%. The gap is not a rounding error, it is most of the point of the exercise.
It is the reason starting early beats being clever.
Interrupting it. Selling in a panic, or withdrawing early, amputates the part of the curve that does all the work.
Related terms
See Compound interest on a real company
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