Compound Interest Explained: The 8th Wonder of the World

Albert Einstein reportedly said, "Compound interest is the eighth wonder of the world. He who understands it, earns it... he who doesn't... pays it."

But what actually is it? And why does it arguably matter more than your salary?

Simple vs. Compound Interest

Simple Interest: You invest $100. It earns 10% ($10). Next year, you invest another $100. You now earn $10 on the first $100 and $10 on the second. Your wealth grows linearly.

Compound Interest: You invest $100. It earns 10% ($10). You now have $110. Next year, you earn 10% on $110, which is $11. The year after, you earn 10% on $121, which is $12.10.

It sounds small at first. But over 30 or 40 years, it's the difference between having $500,000 and $2,000,000.

Time is Your Greatest Asset

Because the growth is exponential, the earlier you start, the less you have to save.

• Start at 25: Save $300/month → Retire a millionaire.
• Start at 35: Save $600/month → Retire a millionaire.
• Start at 45: Save $1,400/month → Retire a millionaire.

How to Harness It

You don't need a PhD. You just need consistency.

1. Open a retirement account (401k or Roth IRA).
2. Buy low-cost index funds (like the S&P 500) which historically return ~7-10% annually.
3. Automate your contributions.
4. Wait.