Compound Interest Basics
Educational only — not financial advice. Updated 2025-11-12.
Compounding turns steady contributions and time into exponential-looking growth. Keep costs low and automate the process.
The Core Idea
Compounding is growth on growth. Returns earned this period become part of your principal for the next period.
ASCII curve (illustrative) Year 1 : ███ Year 5 : ████████ Year 10: ███████████████
Simple vs Compound Return
| Type | Formula | Example |
|---|---|---|
| Simple | P × r × t | $10,000 at 5% for 3y = $1,500 |
| Compound | P × (1 + r)^t − P | $10,000 at 5% for 3y = $1,576 |
Contribution Schedules
| Schedule | Behaviour Benefit | Note |
|---|---|---|
| Monthly fixed | Automates saving | Pairs well with DCA |
| Biweekly | Matches pay cycles | 26 contributions/year |
| Lump-sum | Max exposure immediately | Higher short-term volatility |
Assumptions That Matter
- Net returns (after fees) drive outcomes.
- Time horizon dominates short-term timing.
- Taxes and withdrawals can slow compounding.
Checklist
- Pick a contribution cadence.
- Use low-cost funds to keep more return.
- Automate deposits; increase yearly.
- Avoid interrupting the curve.