How to Make Compound Interest Work for You
Compound interest rewards patience more than anything else. These examples show which choices make the biggest difference to how much you end up with.
Open the tool: Compound Interest Calculator
Start as early as you can
Ten years of extra time can matter more than a higher contribution. $300 a month at 6% a year until age 65:
| Start at age | Paid in | Balance at 65 |
|---|---|---|
| 25 | $144,000 | $572,465 |
| 35 | $108,000 | $292,436 |
| 45 | $72,000 | $136,070 |
Raise your contributions every year
Increasing what you save in line with your pay keeps your plan on track. $300 a month at 6% for 30 years:
| Yearly increase | Paid in | Balance after 30 years |
|---|---|---|
| 0% | $108,000 | $292,436 |
| 3% | $171,271 | $408,891 |
Keep fees low
Fees come straight off your return, and the loss compounds too. $500 a month for 30 years grows to $584,948 at 7%, but only to $487,394 at 6%. One percentage point in fees costs $97,555, while you paid in $180,000 in total.
Compare the total yearly cost of funds and accounts, not only the headline return.
Plan in today's money
A balance far in the future looks large, but prices rise in the meantime. Set an inflation rate in the calculator to see what your savings will be worth in today's money.
If your savings grow more slowly than inflation, they lose buying power even when the balance goes up.
Checklist before you start
A good plan is one you can keep up for years. Before you start, check these points:
- Pay off expensive debt first, because its interest compounds against you.
- Keep an emergency fund so you never have to sell at a bad time.
- Use tax-advantaged accounts available in your country.
- Automate your contribution on payday.
- Review the plan once a year, not every day.