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How money grows · Lesson 3 of 11

Compound Growth: Why Starting Early and Steady Both Help

See how compound growth works, why time does much of the work, and how three savers compare, with a clear reminder that growth is never promised.

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THE WRITTEN LESSONFollow along at your pace

People say it pays to start early, and there is real arithmetic behind it. In this lesson you see how money can grow on its own growth, how three savers end up in different places, and why none of it is a promise.

Simple or compound

Say you put 100 dollars somewhere that earns 5 percent a year. After one year you have 105 dollars. With simple interest, you earn the same 5 dollars every year. With compound interestcompound interest: Interest worked out on the original amount plus the interest already added to it, so the total grows faster over time. It works for savers and against borrowers, whose unpaid interest itself starts to attract interest.Full entry in the glossary, you also earn interest on the interest you already earned. So after three years you would have 115 dollars and 76 cents, instead of 115. That is growth on your growth.

Two stacks of coins for $100 at 5% a year. Simple grows to $105, $110 and $115 over three years. Compound grows to $105, $110.25 and $115.76, with the extra coins circled. A banner says Interest on your interest.(opens the full-size picture)
The compound stacks pull ahead by a few cents, and the gap keeps widening.

What 30 years does

That small difference grows with time. Leave 1,000 dollars at 5 percent for 30 years and add nothing. With simple interest it reaches 2,500 dollars. With compound growth it reaches about 4,322 dollars. The curve bends upward because each year’s growth is bigger than the last. Early on the two lines look almost the same, and the difference only becomes obvious after many years.

A chart of $1,000 at 5% for 30 years. A straight grey line labeled Simple interest ends at $2,500. A curving green line labeled Compound growth ends at $4,322.(opens the full-size picture)
Over 30 years, the curved line leaves the straight one far behind.

Three savers

Now meet three savers. Each puts in 100 dollars a month. The early starter saves from age 25 to 35, then stops. The late starter saves from 35 to 65. The steady saver saves from 25 all the way to 65. These are made-up people, used to show how the numbers behave.

Three savers on a timeline from age 25 to 65, each saving $100 a month. The early starter saves from 25 to 35 and pays in $12,000. The late starter saves from 35 to 65 and pays in $36,000. The steady saver saves from 25 to 65 and pays in $48,000.(opens the full-size picture)
Same monthly amount, three different timings.

Who ends ahead

At 5 percent a year, the early starter ends with about 69,000 dollars. The late starter ends with about 83,000. The steady saver ends with about 153,000. You may have heard that ten early years beat thirty later ones. In this example that only happened at 7 percent. The steady saver came out ahead every time.

Three bars at 5% a year at age 65: early starter about $69,000, late starter about $83,000, steady saver about $153,000. A note says 10 early years beat 30 later? Only at 7%.(opens the full-size picture)
The saver who started early and kept going ended with the most.

Growth is never promised

Growth from investing is not guaranteed. Returns can be low, or even negative for a while. Losses also hurt more than the matching gain helps: a 50 percent gain followed by a 50 percent loss does not bring you back to even. It turns 100 dollars into 75.

A crossed-out claim, Up 50%, then down 50% equals back to even. Below it the working: $100 plus 50% is $150, then $150 minus 50% is $75, Not back to $100. A chart shows the line rising to $150 and falling to $75.(opens the full-size picture)
Up 50 percent then down 50 percent leaves you at 75 dollars.

Help compounding do its work

You can give compounding a better chance in three ways. Reinvest what your money earns, such as dividendsdividend: A portion of a company's profit paid out to its shareholders, usually in cash. A dividend is not free money: the share price tends to fall by about the payout when the share goes ex-dividend, and the tax on it depends on the country.Full entry in the glossary, instead of spending it. Start when you can, even with a small amount. And remember that it is never too late to begin.

A checklist titled Help it grow: 1. Reinvest what it earns, 2. Start when you can, even small, 3. Never too late. Beside it, a clock, a jar of coins and a small plant in a pot.(opens the full-size picture)
Three habits that give compounding room to work.

YOUR TURN

These figures are examples, not forecasts. For personal decisions, see a regulated adviser.

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Read the full lesson script

Why do people say it pays to start early? In this lesson, you'll see how money can grow on its own growth, and why time matters so much.

Say you put 100 dollars somewhere that earns 5 percent a year. After one year, you have 105 dollars. With simple interest, you earn 5 dollars every year. With compound interest, you also earn interest on your interest. So after three years, you'd have 115 dollars and 76 cents, instead of 115.

That small difference grows with time. Leave 1,000 dollars at 5 percent for 30 years, and add nothing. With simple interest, it reaches 2,500 dollars. With compound growth, it reaches about 4,322 dollars.

Now meet three savers. Each one puts in 100 dollars a month. The early starter saves from age 25 to 35, then stops. The late starter saves from 35 to 65. The steady saver saves from 25 all the way to 65.

At 5 percent a year, the early starter ends with about 69,000 dollars. The late starter ends with about 83,000. And the steady saver ends with about 153,000. You may have heard that ten early years beat thirty later ones. In our example, that only happened at 7 percent. The steady saver came out ahead every time.

Growth from investing is never promised, though. Returns can be low, or even negative for a while. And a 50 percent gain followed by a 50 percent loss doesn't bring you back to even. It turns 100 dollars into 75.

You can help compounding do its work. Reinvest what your money earns, such as dividends, instead of spending it. Start when you can, even with a small amount. And remember, it's never too late to begin.

So remember: compound growth is growth on your growth. Time does a lot of the work, so starting earlier and saving steadily both help. And nothing is promised. Before the next lesson, use a free compound interest calculator. Try 100 dollars a month at 3, 5 and 7 percent, then start five years later and compare. In the next lesson, you'll see how risk and time fit together.