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Compound Interest
Compound interest is growth on growth. Reinvesting returns turns a small stream into a river over long periods, especially in tax‑advantaged accounts.
The compounding formula
Future value = Start × (1 + rate) ^ years. Small differences in fees and time dwarf one‑off stock picks.
Lower fees raise your effective rate every year. That’s why low‑cost ETFs are powerful.
Practical ways to harness compounding
Automate contributions, reinvest dividends, and avoid interrupting compounding with emotional trades.
Shelter returns in TFSA/RRSP when possible to reduce taxes dragging on growth.
FAQ
What rate should I assume?
For planning, many investors use 4–7% before inflation for diversified portfolios. The future is uncertain; use ranges.
Monthly vs annual contributions?
Monthly contributions smooth the ride and typically increase your ending balance versus waiting to invest yearly.