What Compound Interest Actually Is
Simple interest pays you interest only on your principal. Compound interest pays you interest on your principal AND on the interest you've already earned. That difference is everything.
| Year | Simple interest (7% on $10k) | Compound interest (7% on $10k) |
|---|---|---|
| 1 | $700 | $700 |
| 5 | $3,500 | $4,026 |
| 10 | $7,000 | $9,672 |
| 20 | $14,000 | $28,697 |
| 30 | $21,000 | $66,144 |
Compound interest is exponential, not linear. The same $10,000 earning 7% compounded annually turns into $76,123 after 30 years — nearly 4× what simple interest would produce.
The Road to $1,000,000: Four Scenarios
All four scenarios assume a 7% average annual return (the historical S&P 500 real return after inflation) and monthly compounding via index funds.
| Start age | Monthly savings | Age at $1M | Total contributed |
|---|---|---|---|
| 25 | $400/mo | 65 | $192,000 |
| 25 | $600/mo | 60 | $252,000 |
| 35 | $600/mo | 67 | $230,400 |
| 35 | $1,000/mo | 63 | $336,000 |
The Rule of 72: Mental Maths for Doubling
The Rule of 72 tells you how many years it takes your money to double: divide 72 by the annual interest rate.
| Rate | Years to double | Real-world example |
|---|---|---|
| 2% (savings account) | 36 years | $10,000 → $20,000 by retirement |
| 4% (bond fund) | 18 years | $10,000 → $20,000 in 18 yrs |
| 7% (stock index fund) | 10.3 years | $10,000 → $20,000 → $40,000 in 20 yrs |
| 10% (aggressive growth) | 7.2 years | $10,000 → $40,000+ in 21 yrs |
A 1% annual fee sounds tiny. But on a $500,000 portfolio earning 7%, a 1% fee drops your net return to 6% — costing you about $158,000 over 20 years in lost compound growth. Choose low-cost index funds (expense ratios under 0.10%).
Starting Late: It's Not Too Late
If you're 45 and haven't started seriously saving, a 20-year runway is still powerful. $1,000/month at 7% from age 45 becomes $520,926 by 65. Not a million — but a meaningful supplement to Social Security.
Waiting. Every year you delay costs you a doubling cycle in the long run. Someone who starts at 25 and stops at 35 (10 years of contributions) often outperforms someone who starts at 35 and contributes every year until 65. That's 30 years of contributions vs 10 — and the early starter wins. This is the time value of money at work.
Plug in your exact numbers: current savings, monthly contribution, years to retire, expected return. The Compound Interest Calculator shows your exact wealth trajectory — and how much you're leaving on the table by waiting even 5 more years.