Compound interest: why starting early matters more than starting big

Compound interest is earning returns on your returns. The first year you earn on what you put in; the second, on what you put in plus what you already earned; and so on every year. At first you barely notice it, but over time the curve takes off.

An example with 500 pesos a week

500 pesos every week is about 26,000 pesos a year. If that investment grew at a steady 10 % a year (an assumption, not a promise):

Look at what happens between year 20 and 30: you put in 260,000 more, but the value grows almost 2.8 million. Most of it no longer comes from your money, but from returns on returns.

At 7 % a year, the same 30 years would give about 2.46 million. The rate matters, but time matters even more.

The rule of 72

To estimate how many years it takes for your money to double, divide 72 by the yearly rate:

• At 6 %: 72 ÷ 6 = 12 years.
• At 10 %: 72 ÷ 10 ≈ 7 years.
• At 12 %: 72 ÷ 12 = 6 years.

The enemy: interruptions

Compound interest needs uninterrupted time. What hurts it most:

• Pulling money out early, especially during a drop. Selling at the worst moment turns a temporary decline into a real loss. See investor mindset.
• High fees, charged every year on the whole balance.
• Waiting for the perfect moment to start. Every year you wait is one less year of growth at the end of the curve, which is where most of it is.

Try it with your numbers

On each portfolio page of this site there is a projection tool: change the yearly rate, add a yearly contribution (for example, a new portfolio every year) and see how much it could be worth in 5, 10, 20 or 30 years. It is illustrative: in reality there are good and bad years, and past returns do not guarantee future ones.

What matters to get started

• Compound interest is earning on what you already earned.
• Time is the most powerful ingredient: starting early with little usually beats starting late with a lot.
• Consistency helps: a purchase every week. See investing every week.