The Power of Compound InterestWhy You Should Start Investing Now
Albert Einstein is often credited with saying “Compound interest is the eighth wonder of the world.” And for good reason! It’s one of the most powerful tools to grow your wealth over time. Compound interest is where your money earns returns, and those returns generate even more returns. Timing is key; the earlier you start investing, the longer your money has to multiply.
Here’s an example. Imagine investing $100,000 at an 8% annual return. If you do nothing else, in 20 years, you would have around $466,096! Now consider what happens if you contribute an extra $300 per month. That small monthly contribution turns the balance into $637,894! That’s the power of compounding—letting time do the heavy lifting.
Chart Source: Trajan Wealth estimates. Based on annual compound frequency.
Top 3 Takeaways On Compound Interest
Time is Your Best Friend: Start Early, Even If It Is Small.
The biggest advantage of compound interest isn’t just the rate of return—it’s time. In fact, time is the most valuable asset in investing. The earlier you start, the more time you give your money to grow through the power of compound interest. Every year you delay investing means missing out on potential growth. Small, consistent contributions over decades can turn modest savings into significant wealth. By understanding and leveraging the impact of time, you can build a more secure financial future and take advantage of the opportunities that long-term investing provides.
Chart data from 2005-2024. Source: Bloomberg, Trajan® Wealth estimates
Consistency Beats Timing the Market.
Many people hesitate to invest because they’re waiting for the “perfect” moment. But the reality is, time in the market is more important than timing the market. By consistently investing, regardless of short-term market fluctuations, you allow compounding to work its magic. Dollar-cost averaging —investing a fixed amount regularly— helps smooth out market volatility and maximizes long-term gains.
Other Key Principles to Remember
- The Snowball Effect: The more you invest and reinvest your earnings, the faster your wealth grows—like a snowball rolling downhill.
- Avoid Unnecessary Withdrawals: Compounding only works if you let your investments grow. Early withdrawals cut into future gains.
- Reinvesting Dividends: If you’re investing in stocks or funds that pay dividends, reinvesting them accelerates the power of compounding.
Remember, waiting even a few years to start can mean missing out on thousands of dollars in growth.
The best time to invest was yesterday; the second-best time is today!
