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When it comes to investing, fortune favors those who have more time to invest. The earlier you get started, the longer you’ll have to take advantage of compound interest. Read on to learn what compound interest is and why you should start investing as early as possible.

What is Interest?

In a nutshell, interest is the price someone pays to borrow money.

For instance, when you borrow money from a bank or other lending institution, you typically agree to repay the principal plus an additional percentage in exchange for the service. Typically, when comparing like loan instruments, the longer the loan, the higher the interest (to offset inflation).

On the other side, if you are investing in the stock market, you are seeking to earn a rate of return on the money you have invested. The reason you earn that interest is because you are essentially giving that money to a company in exchange for ownership and ultimately a return on your investment (money above and beyond your initial investment).

What is Compound Interest?

Compound interest is the interest you earn on your interest.

For example, let’s say you buy a stock with a yearly dividend yield of 3% with dividends paid quarterly. The end of the quarter after purchasing the stock, you receive 0.75% in the form of dividends (3%/4 = 0.75%). Instead of just taking the dividend, you decide to reinvest and purchase additional stock with the dividend. When the next quarter roles around, you receive 0.75%, but you now earn it on 100.75% of the stock you purchased originally. Instead of just earning 0.75%, you now earn 0.756%. If you keep doing this, your dividends will continue to increase in value over time even if you don’t contribute any more capital.

The beautiful thing about compound interest is that it falls on an exponential curve. What this means is that it’s not only increasing in value, but the rate of increase in value over time is also increasing. In other words, the longer the time period, the faster the value increases.

What is the Average Stock Market Return?

A good benchmark of American stock market performance is the S&P 500. Since inception (1926), it has returned ~10% on average. Adjusted for inflation, the average annual return drops to ~7%.

The American Stock Market and Compound Interest

Taking what we learned earlier about compound interest and the market’s average performance over the past century (give or take a few years), if you had your money invested in an S&P 500 or Total Stock Market index fund or ETF, on average, you would have doubled your original investment approximately every 7 years (assuming ~10% interest).

Investment Examples

Lump Sum Investment

If you just invested $10,000 in an S&P 500 index fund at 25 years old and reinvested the earnings, by 60 your original $10,000 would grow to ~$280,000 on average. This is 28x your original investment!

Rate of Return 10% Initial Investment $10,000.00 Recurring Investments $0.00 Age Investment Previous Year’s Total Interest End of Year Total 25 $10,000.00 $1,000.00 $11,000.00 26 $11,000.00 $1,100.00 $12,100.00 27 $12,100.00 $1,210.00 $13,310.00 28 $13,310.00 $1,331.00 $14,641.00 29 $14,641.00 $1,464.10 $16,105.10 30 $16,105.10 $1,610.51 $17,715.61 31 $17,715.61 $1,771.56 $19,487.17 32 $19,487.17 $1,948.72 $21,435.89 33 $21,435.89 $2,143.59 $23,579.48 34 $23,579.48 $2,357.95 $25,937.42 35 $25,937.42 $2,593.74 $28,531.17 36 $28,531.17 $2,853.12 $31,384.28 37 $31,384.28 $3,138.43 $34,522.71 38 $34,522.71 $3,452.27 $37,974.98 39 $37,974.98 $3,797.50 $41,772.48 40 $41,772.48 $4,177.25 $45,949.73 41 $45,949.73 $4,594.97 $50,544.70 42 $50,544.70 $5,054.47 $55,599.17 43 $55,599.17 $5,559.92 $61,159.09 44 $61,159.09 $6,115.91 $67,275.00 45 $67,275.00 $6,727.50 $74,002.50 46 $74,002.50 $7,400.25 $81,402.75 47 $81,402.75 $8,140.27 $89,543.02 48 $89,543.02 $8,954.30 $98,497.33 49 $98,497.33 $9,849.73 $108,347.06 50 $108,347.06 $10,834.71 $119,181.77 51 $119,181.77 $11,918.18 $131,099.94 52 $131,099.94 $13,109.99 $144,209.94 53 $144,209.94 $14,420.99 $158,630.93 54 $158,630.93 $15,863.09 $174,494.02 55 $174,494.02 $17,449.40 $191,943.42 56 $191,943.42 $19,194.34 $211,137.77 57 $211,137.77 $21,113.78 $232,251.54 58 $232,251.54 $23,225.15 $255,476.70 59 $255,476.70 $25,547.67 $281,024.37

If you have not reinvested the earnings, you would have only earned ~$45,000 ($10,000 plus $1,000/year for 35 years) by 60 (only 4.5x your original investment). That’s a difference of ~$235,000!

For the same example, if you started investing at 35 years old and reinvested the earnings, by 60 it would only grow to ~108,000 on average. Those ten years account for ~$172,000.

Rate of Return 10% Initial Investment $10,000.00 Recurring Investments $0.00 Age Investment Previous Year’s Total Interest End of Year Total 35 $10,000.00 $0.00 $1,000.00 $11,000.00 36 $11,000.00 $1,100.00 $12,100.00 37 $12,100.00 $1,210.00 $13,310.00 38 $13,310.00 $1,331.00 $14,641.00 39 $14,641.00 $1,464.10 $16,105.10 40 $16,105.10 $1,610.51 $17,715.61 41 $17,715.61 $1,771.56 $19,487.17 42 $19,487.17 $1,948.72 $21,435.89 43 $21,435.89 $2,143.59 $23,579.48 44 $23,579.48 $2,357.95 $25,937.42 45 $25,937.42 $2,593.74 $28,531.17 46 $28,531.17 $2,853.12 $31,384.28 47 $31,384.28 $3,138.43 $34,522.71 48 $34,522.71 $3,452.27 $37,974.98 49 $37,974.98 $3,797.50 $41,772.48 50 $41,772.48 $4,177.25 $45,949.73 51 $45,949.73 $4,594.97 $50,544.70 52 $50,544.70 $5,054.47 $55,599.17 53 $55,599.17 $5,559.92 $61,159.09 54 $61,159.09 $6,115.91 $67,275.00 55 $67,275.00 $6,727.50 $74,002.50 56 $74,002.50 $7,400.25 $81,402.75 57 $81,402.75 $8,140.27 $89,543.02 58 $89,543.02 $8,954.30 $98,497.33 59 $98,497.33 $9,849.73 $108,347.06

Recurring Investments

If you instead had invested $2,500/year at 25 years old and reinvested the earnings, by 60 your $2,500/year would grow to ~745,000 on average.

Rate of Return 10% Initial Investment $2500 Recurring Investments $2500 Age Investment Previous Year’s Total Interest End of Year Total 25 $2,500.00 $250.00 $2,750.00 26 $2,500.00 $2,750.00 $525.00 $5,775.00 27 $2,500.00 $5,775.00 $827.50 $9,102.50 28 $2,500.00 $9,102.50 $1,160.25 $12,762.75 29 $2,500.00 $12,762.75 $1,526.28 $16,789.03 30 $2,500.00 $16,789.03 $1,928.90 $21,217.93 31 $2,500.00 $21,217.93 $2,371.79 $26,089.72 32 $2,500.00 $26,089.72 $2,858.97 $31,448.69 33 $2,500.00 $31,448.69 $3,394.87 $37,343.56 34 $2,500.00 $37,343.56 $3,984.36 $43,827.92 35 $2,500.00 $43,827.92 $4,632.79 $50,960.71 36 $2,500.00 $50,960.71 $5,346.07 $58,806.78 37 $2,500.00 $58,806.78 $6,130.68 $67,437.46 38 $2,500.00 $67,437.46 $6,993.75 $76,931.20 39 $2,500.00 $76,931.20 $7,943.12 $87,374.32 40 $2,500.00 $87,374.32 $8,987.43 $98,861.76 41 $2,500.00 $98,861.76 $10,136.18 $111,497.93 42 $2,500.00 $111,497.93 $11,399.79 $125,397.73 43 $2,500.00 $125,397.73 $12,789.77 $140,687.50 44 $2,500.00 $140,687.50 $14,318.75 $157,506.25 45 $2,500.00 $157,506.25 $16,000.62 $176,006.87 46 $2,500.00 $176,006.87 $17,850.69 $196,357.56 47 $2,500.00 $196,357.56 $19,885.76 $218,743.32 48 $2,500.00 $218,743.32 $22,124.33 $243,367.65 49 $2,500.00 $243,367.65 $24,586.76 $270,454.41 50 $2,500.00 $270,454.41 $27,295.44 $300,249.85 51 $2,500.00 $300,249.85 $30,274.99 $333,024.84 52 $2,500.00 $333,024.84 $33,552.48 $369,077.32 53 $2,500.00 $369,077.32 $37,157.73 $408,735.06 54 $2,500.00 $408,735.06 $41,123.51 $452,358.56 55 $2,500.00 $452,358.56 $45,485.86 $500,344.42 56 $2,500.00 $500,344.42 $50,284.44 $553,128.86 57 $2,500.00 $553,128.86 $55,562.89 $611,191.75 58 $2,500.00 $611,191.75 $61,369.17 $675,060.92 59 $2,500.00 $675,060.92 $67,756.09 $745,317.01

For the same example, if you started investing at 35 years old and reinvested the earnings, by 60 it would only grow to ~270,000. Those ten years account for ~$475,000.

Rate of Return 10% Initial Investment $2500 Recurring Investments $2500 Age Investment Previous Year’s Total Interest End of Year Total 35 $2,500.00 $0.00 $250.00 $2,750.00 36 $2,500.00 $2,750.00 $525.00 $5,775.00 37 $2,500.00 $5,775.00 $827.50 $9,102.50 38 $2,500.00 $9,102.50 $1,160.25 $12,762.75 39 $2,500.00 $12,762.75 $1,526.28 $16,789.03 40 $2,500.00 $16,789.03 $1,928.90 $21,217.93 41 $2,500.00 $21,217.93 $2,371.79 $26,089.72 42 $2,500.00 $26,089.72 $2,858.97 $31,448.69 43 $2,500.00 $31,448.69 $3,394.87 $37,343.56 44 $2,500.00 $37,343.56 $3,984.36 $43,827.92 45 $2,500.00 $43,827.92 $4,632.79 $50,960.71 46 $2,500.00 $50,960.71 $5,346.07 $58,806.78 47 $2,500.00 $58,806.78 $6,130.68 $67,437.46 48 $2,500.00 $67,437.46 $6,993.75 $76,931.20 49 $2,500.00 $76,931.20 $7,943.12 $87,374.32 50 $2,500.00 $87,374.32 $8,987.43 $98,861.76 51 $2,500.00 $98,861.76 $10,136.18 $111,497.93 52 $2,500.00 $111,497.93 $11,399.79 $125,397.73 53 $2,500.00 $125,397.73 $12,789.77 $140,687.50 54 $2,500.00 $140,687.50 $14,318.75 $157,506.25 55 $2,500.00 $157,506.25 $16,000.62 $176,006.87 56 $2,500.00 $176,006.87 $17,850.69 $196,357.56 57 $2,500.00 $196,357.56 $19,885.76 $218,743.32 58 $2,500.00 $218,743.32 $22,124.33 $243,367.65 59 $2,500.00 $243,367.65 $24,586.76 $270,454.41

Compound Interest Excel Template

Please see below a quick template that shows how to setup a quick lump sum investment and recurring investments compound interest calculator. I’ve taken the tables above and turned on “show formulas”, so you can create your own compound interest calculator.

To take advantage of a combination of both a lump sum initial investment and recurring investments, you just set the first cell to add the Initial Investment and Recurring Investments. The three values at the top are all inputs, everything else is calculated based off of those inputs. You can change the ages to whatever you want and the calculations should still hold true.

Rate of Return 0.1 Initial Investment 10000 Recurring Investments 0 Age Initial Investment Previous Year’s Total Interest End of Year Total 35 =$D$4 =E17 =(C18+B18)*$D$3 =C18+D18+B18 36 =E18 =(C19+B19)*$D$3 =C19+D19+B19 37 =E19 =(C20+B20)*$D$3 =C20+D20+B20 38 =E20 =(C21+B21)*$D$3 =C21+D21+B21 39 =E21 =(C22+B22)*$D$3 =C22+D22+B22 40 =E22 =(C23+B23)*$D$3 =C23+D23+B23 41 =E23 =(C24+B24)*$D$3 =C24+D24+B24 42 =E24 =(C25+B25)*$D$3 =C25+D25+B25 43 =E25 =(C26+B26)*$D$3 =C26+D26+B26 44 =E26 =(C27+B27)*$D$3 =C27+D27+B27 45 =E27 =(C28+B28)*$D$3 =C28+D28+B28 46 =E28 =(C29+B29)*$D$3 =C29+D29+B29 47 =E29 =(C30+B30)*$D$3 =C30+D30+B30 48 =E30 =(C31+B31)*$D$3 =C31+D31+B31 49 =E31 =(C32+B32)*$D$3 =C32+D32+B32 50 =E32 =(C33+B33)*$D$3 =C33+D33+B33 51 =E33 =(C34+B34)*$D$3 =C34+D34+B34 52 =E34 =(C35+B35)*$D$3 =C35+D35+B35 53 =E35 =(C36+B36)*$D$3 =C36+D36+B36 54 =E36 =(C37+B37)*$D$3 =C37+D37+B37 55 =E37 =(C38+B38)*$D$3 =C38+D38+B38 56 =E38 =(C39+B39)*$D$3 =C39+D39+B39 57 =E39 =(C40+B40)*$D$3 =C40+D40+B40 58 =E40 =(C41+B41)*$D$3 =C41+D41+B41 59 =E41 =(C42+B42)*$D$3 =C42+D42+B42

Rate of Return 0.1 Initial Investment 0 Recurring Investments 2500 Age Investments Previous Year’s Total Interest End of Year Total 35 =$K$5 =L17 =(J18+I18)*$D$3 =J18+K18+I18 36 =$K$5 =L18 =(J19+I19)*$D$3 =J19+K19+I19 37 =$K$5 =L19 =(J20+I20)*$D$3 =J20+K20+I20 38 =$K$5 =L20 =(J21+I21)*$D$3 =J21+K21+I21 39 =$K$5 =L21 =(J22+I22)*$D$3 =J22+K22+I22 40 =$K$5 =L22 =(J23+I23)*$D$3 =J23+K23+I23 41 =$K$5 =L23 =(J24+I24)*$D$3 =J24+K24+I24 42 =$K$5 =L24 =(J25+I25)*$D$3 =J25+K25+I25 43 =$K$5 =L25 =(J26+I26)*$D$3 =J26+K26+I26 44 =$K$5 =L26 =(J27+I27)*$D$3 =J27+K27+I27 45 =$K$5 =L27 =(J28+I28)*$D$3 =J28+K28+I28 46 =$K$5 =L28 =(J29+I29)*$D$3 =J29+K29+I29 47 =$K$5 =L29 =(J30+I30)*$D$3 =J30+K30+I30 48 =$K$5 =L30 =(J31+I31)*$D$3 =J31+K31+I31 49 =$K$5 =L31 =(J32+I32)*$D$3 =J32+K32+I32 50 =$K$5 =L32 =(J33+I33)*$D$3 =J33+K33+I33 51 =$K$5 =L33 =(J34+I34)*$D$3 =J34+K34+I34 52 =$K$5 =L34 =(J35+I35)*$D$3 =J35+K35+I35 53 =$K$5 =L35 =(J36+I36)*$D$3 =J36+K36+I36 54 =$K$5 =L36 =(J37+I37)*$D$3 =J37+K37+I37 55 =$K$5 =L37 =(J38+I38)*$D$3 =J38+K38+I38 56 =$K$5 =L38 =(J39+I39)*$D$3 =J39+K39+I39 57 =$K$5 =L39 =(J40+I40)*$D$3 =J40+K40+I40 58 =$K$5 =L40 =(J41+I41)*$D$3 =J41+K41+I41 59 =$K$5 =L41 =(J42+I42)*$D$3 =J42+K42+I42

Why You Should Invest Now – Compound Interest

I hope the examples above demonstrate why it’s so important to invest as much as possible, as early as possible. The more time your money has to reinvest and generate compound interest the better off you’ll be financially.

When did you start investing?

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