compounding
Also called: compound interest, compound growth
Growth in which returns are added to the balance and then earn returns themselves, so the balance grows faster over time.
Compounding, or compound interest, means your returns are added to the balance and then earn returns of their own. With simple interest you earn only on what you put in; with compounding you also earn on past gains, so the balance grows faster and faster over time.
When you invest a fixed amount every month, compounding makes time the strongest lever. Money paid in at 25 has 40 years to grow, money paid in at 55 only 10. That is why starting earlier often matters more than finding a slightly higher rate, and why pausing contributions in the middle costs more than the payments you skip.
The curve is flat at first and steep later, which tests patience: in the early years most of the balance is your own money. Compounding also works against you on costs, because every yearly fee is a lost return that would have compounded too.
Example
On the Zapas "goal + monthly amount" screen, $100 a month at 6% a year after inflation from age 25 to 65 grows to $190,768. Only $48,000 of that is paid in; 74.8% of the balance is growth. Starting at 35 gives $97,451 from $36,000 paid in, so waiting 10 years costs $93,316.
Time beats the rate: 20 years at 4% gives $36,384, doubling the rate to 8% gives $56,900, but doubling the years to 40 at 4% gives $116,106. A 3-year pause at 40–42 skips $3,600 of payments and lowers the final balance by $14,141. All numbers are illustrative.
Common mistakes
- Expecting fast growth in the first years, when the curve is still flat.
- Chasing a higher rate instead of starting earlier and keeping going.
- Stopping contributions during a fall and losing the growth they would have earned.
- Investments can fall, and you can get back less than you put in.
Learn it in the course
- Compounding with a monthly amount: time beats the rate · How a fixed monthly amount grows with compounding, why starting ten years earlier beats a higher rate, and what a three-year pause costs.
- A few big winners: why owning everything catches them · Over 20 years most companies do far worse than the index, almost half lose money and a handful make half the gains. Owning the whole market is the only sure way to own those few.
- What 0.2% vs 1.5% does over 10 to 40 years · How much of the final balance different all-in costs take over decades of monthly contributions.