Key ideas

1. Growth gets added to the balance. At 7% compounded monthly, $1,000 becomes about $2,010 in 10 years. Simple interest at 7% gives $1,700.
2. Starting early beats saving more later. At an assumed 7%, $200 a month from age 25 reaches about $524,963 at 65. Starting at 35 reaches $243,994.
3. The rule of 72 estimates doubling time. Divide 72 by the yearly rate. At an assumed 6% a year, that is 72 ÷ 6 = 12 years to double.

Vocabulary

Compound interest

Interest earned on both your original money and the interest it already earned, so growth speeds up over time.

Stock

A small piece of ownership in a company. Its price rises and falls with how investors value the business.

Index fund

A mutual fund or ETF that tries to match a market index by holding the investments in it, rather than picking winners.

Rule of 72

A shortcut to estimate how long money takes to double: divide 72 by the yearly growth rate.

Certificate of deposit

A bank deposit that pays a fixed rate for a set term, like 6 months or 5 years, with a penalty if you take the money out early.

Inflation

The rise in prices over time, which means each dollar buys a little less each year.

Work it out

Sam is 25 and can invest $200 a month. Sam wants to know what waiting until 35 would cost. Both cases assume 7% a year, compounded monthly. Real returns vary and can be negative.

1. Assumed yearly return
2. Start at 25: 480 × $200
3. Growth to age 65
4. Balance at 65, starting at 25
5. Start at 35: 360 × $200
6. Growth to age 65
7. Balance at 65, starting at 35
8. Balance starting at 25
9. Balance starting at 35
10. Cost of waiting 10 years

Check yourself

1. Using the rule of 72, about how long does money take to double at an assumed 9% a year?

   • A. 6 years
   • B. 8 years
   • C. 12 years
   • D. 18 years

2. What makes compound interest different from simple interest?

   • A. You earn interest on past interest as well as on your deposits
   • B. The rate is always higher
   • C. It only applies to stocks

3. Which statement about investment returns is true?

   • A. Index funds pay a fixed 7% a year
   • B. Returns can never be negative
   • C. Returns vary and some years can be losses
   • D. Inflation makes returns bigger

Your turn

Open the compound growth calculator on this page and enter what you could invest each month and your years until 65. Try 4% and 7% to see the range, then set up one automatic contribution, even $25, to a retirement account.