The Beginner's Guide to Compound Interest

Compound interest is often called the eighth wonder of the world – and for good reason. It's the force that can turn modest savings into substantial wealth over time, but it's also something that many people don't fully understand.

What is Compound Interest?

Compound interest is interest earned on both your original investment (the principal) and on previously earned interest. In simple terms, it's "interest on interest," and it's what makes your money grow exponentially rather than linearly.

A Simple Example

Let's say you invest $1,000 at 8% annual interest:

• Year 1: $1,000 × 1.08 = $1,080
• Year 2: $1,080 × 1.08 = $1,166.40
• Year 3: $1,166.40 × 1.08 = $1,259.71

Notice how the dollar amount added each year increases? That's compound interest at work.

The Power of Time

The most important factor in compound interest is time. The earlier you start, the more powerful the effect becomes.

// Simple compound interest calculation
function calculateCompoundInterest(principal, rate, time) {
  return principal * Math.pow(1 + rate, time);
}

// $1,000 invested for 30 years at 8%
const result = calculateCompoundInterest(1000, 0.08, 30);
console.log(result); // $10,062.66

Key Takeaways

1. Start early – Time is your best friend
2. Be consistent – Regular contributions amplify the effect
3. Stay patient – Compound interest works slowly at first, then accelerates
4. Reinvest earnings – Don't withdraw the interest; let it compound

The magic of compound interest isn't really magic at all – it's mathematics working in your favor over time.