Glossary
Compound Interest
Compound interest is growth earned not only on the original amount invested but also on the growth already accumulated, so returns generate their own returns over time.
The effect is small at first and enormous later: money growing at 7% a year roughly doubles each decade, so a dollar invested at 25 can double four times by 65 while a dollar invested at 45 doubles only twice. The same mathematics works against borrowers carrying compounding debt.
Why it matters in practice
Compounding is the reason starting early beats starting big, and the reason recurring costs matter so much — a 1% annual fee compounds against a portfolio exactly the way returns compound for it. It rewards two behaviors above all: beginning, and not interrupting.
Related terms: Rule of 72 · Time Horizon · Expense Ratio · Dollar-Cost Averaging · Real Return