Compound investing is the strategy of earning returns not only on your original investment (the principal) but also on the returns that investment has already generated. Over time, this leads to exponential growth of your wealth — hence the nickname "the snowball effect."
Here’s a breakdown of the basics:
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🧮 1. Core Formula
Compound Interest = P × (1 + r/n)^(nt)
Where:
P = principal (initial amount)
r = annual interest rate (in decimal form)
n = number of compounding periods per year
t = number of years
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📊 2. How It Works
Let’s say you invest $1,000 at an annual return of 10%, compounded annually:
Year 1: $1,000 × 1.10 = $1,100
Year 2: $1,100 × 1.10 = $1,210
Year 3: $1,210 × 1.10 = $1,331
It’s not just the original $1,000 growing—it’s the $100 in gains from year 1 also earning interest in year 2.
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💡 3. Key Factors
Time: The earlier you start, the more powerful compounding becomes. Time is your best ally.
Rate of return: Even small differences in return percentages make a huge impact over time.
Compounding frequency: Daily > Monthly > Quarterly > Annually. More frequent compounding = faster growth.
Consistency: Regular contributions (like monthly investing) speed up compounding.
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📈 4. Compound vs Simple Interest
Feature Simple Interest Compound Interest
Earns on Principal only Principal + previous gains
Growth pattern Linear Exponential
Best for Short-term loans Long-term investing
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🔁 5. Example with Regular Contributions
Invest $200/month at 8% return for 30 years:
Total contributions: $72,000
Ending balance: ~$280,000
That’s compound investing flexing its muscles.
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🔐 6. Real-Life Tools
401(k), IRA, Roth IRA
Index Funds / ETFs
Dividend reinvestment plans (DRIPs)
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💬 In a Nutshell:
> “Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t, pays it.” — La'Nardo Myrick Sr