The Magic of Compound Interest

Albert Einstein reputedly called compound interest the "eighth wonder of the world." While the quote's origin is debated, the mathematical truth behind it is not.

What is Compound Interest?

Compound interest is simply interest on interest. It's the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest.

A Tale of Two Savers

Imagine two friends, Early Earl and Late Larry.

• Early Earl starts investing $500/month at age 25. He stops at age 35 and never adds another penny, just letting it grow.
• Late Larry waits until age 35 to start. He invests $500/month every single month until age 65.

Who has more money at retirement (age 65)?

Spoiler: Earl usually wins, despite investing for only 10 years compared to Larry's 30 years. That is the power of time.

The Formula

For the math nerds out there:

A = P * (1 + r/n)^(nt)

Where:

• A = the future value of the investment/loan, including interest
• P = the principal investment amount
• r = the annual interest rate (decimal)
• n = the number of times that interest is compounded per unit t
• t = the time the money is invested or borrowed for, in years

How to Get Started

1. Start Now: Time is your biggest asset.
2. Be Consistent: Automate your savings.
3. Use Tax-Sheltered Accounts: Use your TFSA and RRSP to let that growth compound tax-free.

Ready to see how your money can grow? Check out our Calculator to simulate your own scenario.