What is compound interest?
Two people save at the same return but start at different ages.
What is compound interest? Your returns stay invested and earn returns too, so the longer money stays, the faster it grows.
Elowen saves €367 a month at 8% a year from 22 to 32, Devlin from 32 to 62. Who has more at 62?
- Elowen pays monthly
- €367Ages 22–32; holds until 62
- Devlin pays monthly
- €367Ages 32–62
Devlin, because he pays in three times as much
Devlin pays in three times as much. Elowen’s money keeps growing during the 30 years after her payments stop.
Both savers finish with similar balances
Equal monthly payments do not mean equal balances. Elowen’s earlier payments have more years to earn further returns.
Elowen, because her money grows for longer
Elowen reaches €734,237.90 and Devlin €546,961.92. Her early payments compound for decades after she stops.
At 8% a year, Elowen’s extra years outweigh Devlin’s larger total payments.
Returns are added monthly at a twelfth of the annual rate. Below about 6.11% a year, Devlin has more than Elowen.
Compound interest
Who is behind it
How a lesson is made
Every number in the lessons is either calculated or taken from a dated source. A lesson opens only after a person has reviewed it, and any change is reviewed again.
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Sources
- Investor.gov: Saving over timeThe calculator treats the starting amount, monthly payments, duration, annual rate and frequency of interest payments as separate inputs. It does not establish an expected market return.