How Compound Interest Works: The Engine of Wealth Creation

Albert Einstein famously referred to compound interest as the eighth wonder of the world. Unlike simple interest, which is calculated solely on your original deposit, compound interest earns returns on both your principal and all previous accumulated interest.

$$A = P \left(1 + \frac{r}{n}\right)^{nt}$$ Where: - **A** = Final balance (Future Value) - **P** = Initial principal balance - **r** = Annual nominal interest rate (expressed as a decimal) - **n** = Compounding frequency per year (12 for monthly, 365 for daily) - **t** = Total time in years

Compounding starts slowly and accelerates exponentially in later decades. An investor saving $300 a month starting at age 25 at an 8% annual return accumulates approximately $1.04 million by age 65. Waiting just ten years until age 35 to begin requires saving more than double ($735/month) to achieve that same nest egg.