Interactive lesson

The 8th wonder of the world

Albert Einstein supposedly called compound interest "the eighth wonder of the world — he who understands it, earns it; he who doesn't, pays it". The trouble is that our brains think in straight lines, while compound interest grows on a curve. That's why almost everyone gets the next question wrong. Try it.

1. What does it turn into?

You save $200 a month for 30 years, earning 10% a year. In total, you took $72,000 out of your pocket. How much do you end up with?

Your guess ($)

2. Watch the snowball grow

Move the controls and watch the chart. The light area is money you deposited; the green area is what interest generated on its own. Notice the moment the green passes the light one: that's when your money starts working harder than you do.

Monthly deposit

Time

Interest per year

You deposited—

Interest generated—

Final total—

3. Time is your most valuable asset

With compound interest, when you start matters more than how much you save. Here's the price of delaying, keeping $200/month at 10% a year until age 60:

Each year of delay doesn't cost you "one year of deposits" — it costs the biggest interest year at the very end, which now never happens. That's why "start early with little" beats "start late with a lot".

4. Three things to take away

Time beats rate — up to a point. With $300 a month at 8% a year, adding $100 to the contribution beats gaining a full percentage point of return for essentially any horizon a normal person plans for; the crossover does not arrive until around year 39. Early on, focus on what you control. Over decades, the cost of a bad rate becomes impossible to make up.

The same curve runs against you. Compound interest has no loyalty. A $1,000 credit card balance at 24% APR, left untouched for a year, becomes $1,268 — an effective cost of 26.8%, not 24%. Carry it five years and it reaches $3,281. That is why clearing expensive debt comes before investing: no ordinary investment pays what a card charges.

What the simulation leaves out. Taxes, expense ratios — which compound too, in the wrong direction; a 1% annual fee consumes roughly a quarter of the final balance over 30 years — and inflation. To think in purchasing power, rerun the numbers at a real rate, net of inflation: the balance still grows, just far less than the nominal figure suggests.

Now run your own numbers

Put your contribution, your time frame and your real rate into the full calculator — with a year-by-year table and initial deposit.

Open the Compound Interest Calculator →