Making Compound Interest Work For You

Erick Murray

Today, we’re going to talk about one of the most powerful forces in personal finance—compound interest. 

So, what exactly is compound interest? It’s when you earn interest on your interest. Over time, this creates a snowball effect that can lead to exponential growth in your investments. 

Let’s think about the snowball effect. Suppose you invest $1,000 today, and it grows at a rate of 10% each year. In the first year, you earn $100, bringing your total to $1,100. In the second year, that 10% return applies to your new balance, earning $110 and bringing your total amount after two years to $1,210. As this continues year after year, your account grows, and the interest you earn starts to outpace the amount you contribute. That’s when real wealth building becomes exciting—because your money starts working harder than you do. 

Now, let’s look at the flip side. Compound interest can also work against you. If you carry high-interest debt, the same snowball effect that helps your investments grow can make your debt grow just as quickly if you’re not paying it down. Most credit cards today charge over 25% interest—there are very few investments in the market that can outperform a rate that high. That’s why it’s so important to pay off high-interest debt first, so you can use compound interest to your advantage instead of letting it take advantage of you. 

Now let’s look at a case study of two different investors. They both earn $60,000 a year and invest 15% of their income, or about $750 a month. We’ll assume they both earn an 8% annual rate of return in the market. The only difference between these two investors is when they start and how long they invest. 

Investor A—the early starter—decided that right out of college, instead of buying an expensive car or living more lavishly than others his age, he would start investing at age 25. He puts away $750 a month for ten years and stops at age 35. By that point, he’s contributed a total of $90,000. Instead of touching that money, he leaves it invested until age 65, allowing compound interest to work its magic for 30 more years. 

Investor B, on the other hand, is a later starter—perhaps more like the average American. They get their first big job in their 20s, earn decent money, and decide to enjoy it for a while. They might buy a nicer car or take a few extra trips, thinking that retirement is so far away it’s a “tomorrow me” problem. Eventually, at age 35, they’re ready to invest. They invest the same $750 a month but continue for 20 years instead of ten, contributing twice as much as Investor A by age 55—a total of $180,000. 

At retirement, Investor A’s account is worth about $1.4 million. That’s $90,000 turned into $1.4 million simply by starting early and letting compounding work over time. Meanwhile, Investor B’s account is worth about $793,000—a great amount, but nearly half of what Investor A accumulated despite investing twice as much. 

So what’s the big takeaway? Time in the market beats timing the market. Investor A, by starting ten years earlier and investing half as much, ended up with double the amount by age 65. Starting early gives your money more time to grow—and that’s what builds lasting wealth. You don’t need to invest a huge amount; you just need to start early, stay consistent, and give your money time to grow. 

Because every year you wait, you’re not just missing out on one year of growth—you’re missing out on decades of compounding that could follow. As most will say, the best time to invest was yesterday, but the next best time is today. Start now and let time and compounding do what they do best. One day, you’ll look back and thank yourself for getting started today.