Compounding Interest

The power of compounding interest

Compounding interest means earning interest on your interest plus your original principal and the compounding effect accelerates over time.

In the example below, the blue line represents compound interest and the red line represents simple interest (interest paid on your original investment principal only.) A $50,000 principal invested at 5% interest, compounded annually over 30 years, will grow to $216,097, which is $91,097 more than if only simple interest is earned. And the more frequent the compounding period, say monthly or daily, the faster your money grows.

Start early

The best time to start saving and investing is when you’re young and the power of compounding can work for you for many years, even decades. Say you started saving $5 a week when you were 15. Assuming a 5% compound annual return, at 65, you’d have $57,152. But if you waited 10 years and didn’t start until you were 25, you would have $32,978.34 at age 65. And if you waited even longer, until you were 35 and saved for 30 years, you would only have $18,137.81.


Establishing good financial habits, like paying yourself first and making it automatic, can set you up as a life-long saver and will pay off over the long run.