Compound Interest: Einstein's Eighth Wonder of the World

Compound interest is when your money earns returns, and those returns earn returns. Over time, this creates exponential growth. Albert Einstein allegedly called it the eighth wonder of the world. Example: invest $1,000 at 6% annually. Year 1 = $1,060. Year 2 = $1,124 (earning interest on interest). Year 20 = $3,207. The longer your timeline, the more compound interest works for you.

The Rule of 72: How Long to Double Your Money

Divide 72 by your annual return rate to find how many years to double. Example: 4% return = 72 ÷ 4 = 18 years to double. At 6% = 12 years. At 8% = 9 years. This rule helps you quickly estimate growth. Canadian GICs earning 4% double in 18 years; stock market averaging 8% doubles in 9 years.

Starting Early Is Crucial: The Power of Time

Example: Start investing $3,000/year at age 25 versus age 35. By age 65: Start at 25 = $630,000 (40 years compound). Start at 35 = $270,000 (30 years). That 10-year delay costs you $360,000 in future value at 6% returns. Starting early matters more than the amount — compounding your time is more powerful than compounding your money.

Contribution Frequency: Monthly vs. Annual

Monthly contributions grow faster than lump sum annual because you're investing earlier in the month. Example: $1,200/year as 1 payment vs. $100/month. Monthly compounds 12 times; annual compounds 1 time. The difference is ~2–3% more growth over 20 years. Set up automatic monthly contributions if possible — it's easier to commit $100/month than $1,200 lump sum.

Inflation Erodes Real Returns

Nominal return (stated return) is not the same as real return (after inflation). Example: earn 4% on GIC, inflation is 2.5%, real return is 1.5%. Your money grows, but your purchasing power grows slower. To beat inflation, aim for 5%+ annual returns (stocks, balanced ETFs). Cash earning 0% loses purchasing power every year.