Albert Einstein once called compound interest the “eighth wonder of the world.” Whether or not he said it doesn’t really matter, the sentiment of the statement does. Nothing illustrates the quiet force of time and discipline in finance better than compound interest. It’s the snowball that grows bigger with every roll, turning small amounts into huge outcomes.
In a world that obsesses over quick wins and instant results, compound interest is a great reminder that the most powerful forces in life work slowly, quietly, and then suddenly all at once.
At its simplest, compound interest is interest on interest. Unlike simple interest, which is calculated only on the original principal, compound interest includes the accumulated interest from previous periods. Each cycle adds not just to your base, but to your base plus everything it has already earned. This creates an exponential effect. The more time you give it, the more powerful it becomes.
Here’s a simple example. Imagine you invest $10,000 at a 7% annual return:
After 10 years: $19,671
After 20 years: $38,696
After 30 years: $76,123
In year 30, you earned over $4,700 in interest alone, almost half your original investment, without lifting a finger. That’s the essence of compounding. It’s not a straight line. It’s an exponential curve that rewards those who are patient.
People struggle with exponential thinking. Our brains are wired for linear thinking but exponential growth sneaks up on us. It’s why the pace of pandemics, technology adoption, and investment returns so often surprise us.
There is a classic thought experiment that captures this. If you place one grain of rice on the first square of a chessboard, then double it on every square. So, the second square has 2, the third has 4, the fourth has 8 and so on, until all 64 squares are filled. How many grains do you think it becomes? Well, by the 64th square, the total rice would be 18 quintillion grains. More grains than have ever been produced in human history.
The same principle is at play in your investment portfolio. The early years feel slow, almost frustrating. But with enough time, the numbers start to move sharply upwards. What begins as a trickle becomes a flood.
This is why starting early matters so much. A 20-year-old investing $500 a month until age 60 at 7% annual returns will end up with over $1.2 million. A 30-year-old doing the exact same thing will end with around $600,000 or less than half. The difference isn’t the contribution. It’s the time.
The hardest part of compounding isn’t the math. It’s the discipline. It’s resisting the urge to panic when markets fall, it’s resisting the noise of the daily news cycle or chasing the latest fad or hot stock. The great investor Charlie Munger put it simply: “The first rule of compounding is never to interrupt it unnecessarily.”
My favourite investor, Warren Buffett often says his fortune is the result of “living in America, some lucky genes, and compound interest.” He built one of the greatest fortunes in history not through outrageous risk-taking, but through consistency and time. In fact, over 90% of his net worth was accumulated after age 60. Simply because compounding had decades to snowball.
The greatest mistake people make with compound interest is underestimating it. In the short term, it feels slow. In the long term, it is remarkable. But it isn’t magic, it is basic math, and it is available to anyone with the discipline to let it work. Compound interest is a philosophy of patience, and it rewards those who are not only consistent and disciplined but who also stay the course. Start early, stay consistent, avoid interrupting the process and think long term. The eighth wonder of the world is available to all of us.
General Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.