Lesson 4 of 5 · 6 min read
The power of compounding
According to Einstein, compound interest is the 8th wonder of the world. Here you'll see exactly why — and how to make it work for you.
Return on your return
With simple interest you earn only on your deposit. Compound (compounded interest) means your return itself earns a return on top. Year 1 your deposit grows; year 2 your deposit and the profit from year 1 grow; year 3 all of that grows again. Each year the base gets bigger, so the growth accelerates.
You put in $36,000. The other $42,139 is pure compound growth. Time does most of the work.
A snowball rolling down the mountain
Suppose you put away €1,000 at 8% per year. Year 1 yields €80. But in year 2 you calculate 8% over €1,080, so €86.40. It seems like a tiny extra €6, but that difference doubles and triples each year. After 30 years €1,000 has grown to ~€10,000 — without you doing anything extra.
You put in $36,000. The other $42,139 is pure compound growth. Time does most of the work.
The Rule of 72
A handy trick to estimate compounding in your head: divide 72 by your annual return, and you know in how many years your money doubles. At 8% return: 72 / 8 = 9 years to double. At 6%: 12 years. That's how you immediately sense why a few extra percent of return makes such a difference over a long time.
In practice
€5,000 at 8%: after 9 years €10,000, after 18 years €20,000, after 27 years €40,000. Every 9 years it doubles — the last doubling (€20k → €40k) yields more than all the years before it combined.
A concrete savings example
Depositing €100 per month at 7% average becomes ~€17,000 after 10 years, ~€52,000 after 20 years and ~€122,000 after 30 years. Of that €122,000 you only deposited €36,000 yourself — the other ~€86,000 is pure compounding. Your money works harder than you do.
Stocky says
Note: the largest part of your final amount arises in the last years, because the curve bends upward most steeply then. That's why persevering is more important than a perfect start.
Time beats amount
The most powerful lever is not how much you deposit, but how long you let it grow. Starting early with little beats starting late with a lot, because your early deposit gets the most time to compound.
You put in $36,000. The other $42,139 is pure compound growth. Time does most of the work.
In practice
Anna deposits €200/month from age 25 to 35 (10 years) and then stops completely. Ben doesn't start until age 35 and deposits €200/month until age 65 (30 years). At 7%, Anna still has more at age 65 — she deposited 3× less, but gave her money 10 extra years to grow.
Did you know?
Warren Buffett earned well over 99% of his wealth after age 50. Not because he only got good then, but because compounding needed decades to explode.
Remember this
- Compounding = return that itself makes a return; the growth accelerates every year.
- Rule of 72: 72 ÷ annual return = years to double your money.
- Time is the most powerful lever — starting early beats depositing a lot.
- Most wealth arises in the last years, so persevering is everything.
There is a quiz for this lesson
4 questions that check whether it stuck. They live in the app, because a quiz nobody grades teaches nothing.
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