Lesson 2 of 5 · 6 min read
Compound interest
The most powerful idea in investing: returns on your returns. The earlier you start, the bigger the snowball effect.
The snowball
With compound interest you earn not only on your contribution, but also on the profit you made earlier. That profit then generates returns of its own. In the short term this seems small, in the long term it becomes explosive.
You put in $36,000. The other $42,139 is pure compound growth. Time does most of the work.
An example
If you invest €200 per month at an average of 7% per year, after 10 years you'll have ~€34,000 (of which €24,000 is your own contribution). After 30 years that's ~€243,000 — while you only contributed €72,000 yourself. The rest is pure compound interest.
You put in $36,000. The other $42,139 is pure compound growth. Time does most of the work.
Time > timing
The most important ingredient is time, not the perfect entry moment. Someone who starts early and contributes less often beats someone who contributes much more later. So start as early as possible, even with small amounts.
Remember this
- With compound interest you also earn returns on previously made profit — a snowball.
- €200 per month at 7% grows to ~€243,000 in 30 years on €72,000 of your own contribution.
- The growth is exponential: the curve bends ever more steeply upward as time passes.
- Time matters more than timing or a high contribution — so start as early as possible.
There is a quiz for this lesson
3 questions that check whether it stuck. They live in the app, because a quiz nobody grades teaches nothing.
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