This post may contain affiliate links. Please read my disclosure for more info.
When it comes to investing, fortune favors those who have more time to invest. The earlier you get started, the longer you’ll have to take advantage of compound interest. Read on to learn what compound interest is and why you should start investing as early as possible.
Table of Contents
What is Interest?
In a nutshell, interest is the price someone pays to borrow money.
For instance, when you borrow money from a bank or other lending institution, you typically agree to repay the principal plus an additional percentage in exchange for the service. Typically, when comparing like loan instruments, the longer the loan, the higher the interest (to offset inflation).
On the other side, if you are investing in the stock market, you are seeking to earn a rate of return on the money you have invested. The reason you earn that interest is because you are essentially giving that money to a company in exchange for ownership and ultimately a return on your investment (money above and beyond your initial investment).
What is Compound Interest?
Compound interest is the interest you earn on your interest.
For example, let’s say you buy a stock with a yearly dividend yield of 3% with dividends paid quarterly. The end of the quarter after purchasing the stock, you receive 0.75% in the form of dividends (3%/4 = 0.75%). Instead of just taking the dividend, you decide to reinvest and purchase additional stock with the dividend. When the next quarter roles around, you receive 0.75%, but you now earn it on 100.75% of the stock you purchased originally. Instead of just earning 0.75%, you now earn 0.756%. If you keep doing this, your dividends will continue to increase in value over time even if you don’t contribute any more capital.
The beautiful thing about compound interest is that it falls on an exponential curve. What this means is that it’s not only increasing in value, but the rate of increase in value over time is also increasing. In other words, the longer the time period, the faster the value increases.
What is the Average Stock Market Return?
A good benchmark of American stock market performance is the S&P 500. Since inception (1926), it has returned ~10% on average. Adjusted for inflation, the average annual return drops to ~7%.
The American Stock Market and Compound Interest
Taking what we learned earlier about compound interest and the market’s average performance over the past century (give or take a few years), if you had your money invested in an S&P 500 or Total Stock Market index fund or ETF, on average, you would have doubled your original investment approximately every 7 years (assuming ~10% interest).
Investment Examples
Lump Sum Investment
If you just invested $10,000 in an S&P 500 index fund at 25 years old and reinvested the earnings, by 60 your original $10,000 would grow to ~$280,000 on average. This is 28x your original investment!
| Rate of Return | 10% | |||
| Initial Investment | $10,000.00 | |||
| Recurring Investments | $0.00 | |||
| Age | Investment | Previous Year’s Total | Interest | End of Year Total |
| 25 | $10,000.00 | $1,000.00 | $11,000.00 | |
| 26 | $11,000.00 | $1,100.00 | $12,100.00 | |
| 27 | $12,100.00 | $1,210.00 | $13,310.00 | |
| 28 | $13,310.00 | $1,331.00 | $14,641.00 | |
| 29 | $14,641.00 | $1,464.10 | $16,105.10 | |
| 30 | $16,105.10 | $1,610.51 | $17,715.61 | |
| 31 | $17,715.61 | $1,771.56 | $19,487.17 | |
| 32 | $19,487.17 | $1,948.72 | $21,435.89 | |
| 33 | $21,435.89 | $2,143.59 | $23,579.48 | |
| 34 | $23,579.48 | $2,357.95 | $25,937.42 | |
| 35 | $25,937.42 | $2,593.74 | $28,531.17 | |
| 36 | $28,531.17 | $2,853.12 | $31,384.28 | |
| 37 | $31,384.28 | $3,138.43 | $34,522.71 | |
| 38 | $34,522.71 | $3,452.27 | $37,974.98 | |
| 39 | $37,974.98 | $3,797.50 | $41,772.48 | |
| 40 | $41,772.48 | $4,177.25 | $45,949.73 | |
| 41 | $45,949.73 | $4,594.97 | $50,544.70 | |
| 42 | $50,544.70 | $5,054.47 | $55,599.17 | |
| 43 | $55,599.17 | $5,559.92 | $61,159.09 | |
| 44 | $61,159.09 | $6,115.91 | $67,275.00 | |
| 45 | $67,275.00 | $6,727.50 | $74,002.50 | |
| 46 | $74,002.50 | $7,400.25 | $81,402.75 | |
| 47 | $81,402.75 | $8,140.27 | $89,543.02 | |
| 48 | $89,543.02 | $8,954.30 | $98,497.33 | |
| 49 | $98,497.33 | $9,849.73 | $108,347.06 | |
| 50 | $108,347.06 | $10,834.71 | $119,181.77 | |
| 51 | $119,181.77 | $11,918.18 | $131,099.94 | |
| 52 | $131,099.94 | $13,109.99 | $144,209.94 | |
| 53 | $144,209.94 | $14,420.99 | $158,630.93 | |
| 54 | $158,630.93 | $15,863.09 | $174,494.02 | |
| 55 | $174,494.02 | $17,449.40 | $191,943.42 | |
| 56 | $191,943.42 | $19,194.34 | $211,137.77 | |
| 57 | $211,137.77 | $21,113.78 | $232,251.54 | |
| 58 | $232,251.54 | $23,225.15 | $255,476.70 | |
| 59 | $255,476.70 | $25,547.67 | $281,024.37 |
If you have not reinvested the earnings, you would have only earned ~$45,000 ($10,000 plus $1,000/year for 35 years) by 60 (only 4.5x your original investment). That’s a difference of ~$235,000!
For the same example, if you started investing at 35 years old and reinvested the earnings, by 60 it would only grow to ~108,000 on average. Those ten years account for ~$172,000.
| Rate of Return | 10% | |||
| Initial Investment | $10,000.00 | |||
| Recurring Investments | $0.00 | |||
| Age | Investment | Previous Year’s Total | Interest | End of Year Total |
| 35 | $10,000.00 | $0.00 | $1,000.00 | $11,000.00 |
| 36 | $11,000.00 | $1,100.00 | $12,100.00 | |
| 37 | $12,100.00 | $1,210.00 | $13,310.00 | |
| 38 | $13,310.00 | $1,331.00 | $14,641.00 | |
| 39 | $14,641.00 | $1,464.10 | $16,105.10 | |
| 40 | $16,105.10 | $1,610.51 | $17,715.61 | |
| 41 | $17,715.61 | $1,771.56 | $19,487.17 | |
| 42 | $19,487.17 | $1,948.72 | $21,435.89 | |
| 43 | $21,435.89 | $2,143.59 | $23,579.48 | |
| 44 | $23,579.48 | $2,357.95 | $25,937.42 | |
| 45 | $25,937.42 | $2,593.74 | $28,531.17 | |
| 46 | $28,531.17 | $2,853.12 | $31,384.28 | |
| 47 | $31,384.28 | $3,138.43 | $34,522.71 | |
| 48 | $34,522.71 | $3,452.27 | $37,974.98 | |
| 49 | $37,974.98 | $3,797.50 | $41,772.48 | |
| 50 | $41,772.48 | $4,177.25 | $45,949.73 | |
| 51 | $45,949.73 | $4,594.97 | $50,544.70 | |
| 52 | $50,544.70 | $5,054.47 | $55,599.17 | |
| 53 | $55,599.17 | $5,559.92 | $61,159.09 | |
| 54 | $61,159.09 | $6,115.91 | $67,275.00 | |
| 55 | $67,275.00 | $6,727.50 | $74,002.50 | |
| 56 | $74,002.50 | $7,400.25 | $81,402.75 | |
| 57 | $81,402.75 | $8,140.27 | $89,543.02 | |
| 58 | $89,543.02 | $8,954.30 | $98,497.33 | |
| 59 | $98,497.33 | $9,849.73 | $108,347.06 |
Recurring Investments
If you instead had invested $2,500/year at 25 years old and reinvested the earnings, by 60 your $2,500/year would grow to ~745,000 on average.
| Rate of Return | 10% | |||
| Initial Investment | $2500 | |||
| Recurring Investments | $2500 | |||
| Age | Investment | Previous Year’s Total | Interest | End of Year Total |
| 25 | $2,500.00 | $250.00 | $2,750.00 | |
| 26 | $2,500.00 | $2,750.00 | $525.00 | $5,775.00 |
| 27 | $2,500.00 | $5,775.00 | $827.50 | $9,102.50 |
| 28 | $2,500.00 | $9,102.50 | $1,160.25 | $12,762.75 |
| 29 | $2,500.00 | $12,762.75 | $1,526.28 | $16,789.03 |
| 30 | $2,500.00 | $16,789.03 | $1,928.90 | $21,217.93 |
| 31 | $2,500.00 | $21,217.93 | $2,371.79 | $26,089.72 |
| 32 | $2,500.00 | $26,089.72 | $2,858.97 | $31,448.69 |
| 33 | $2,500.00 | $31,448.69 | $3,394.87 | $37,343.56 |
| 34 | $2,500.00 | $37,343.56 | $3,984.36 | $43,827.92 |
| 35 | $2,500.00 | $43,827.92 | $4,632.79 | $50,960.71 |
| 36 | $2,500.00 | $50,960.71 | $5,346.07 | $58,806.78 |
| 37 | $2,500.00 | $58,806.78 | $6,130.68 | $67,437.46 |
| 38 | $2,500.00 | $67,437.46 | $6,993.75 | $76,931.20 |
| 39 | $2,500.00 | $76,931.20 | $7,943.12 | $87,374.32 |
| 40 | $2,500.00 | $87,374.32 | $8,987.43 | $98,861.76 |
| 41 | $2,500.00 | $98,861.76 | $10,136.18 | $111,497.93 |
| 42 | $2,500.00 | $111,497.93 | $11,399.79 | $125,397.73 |
| 43 | $2,500.00 | $125,397.73 | $12,789.77 | $140,687.50 |
| 44 | $2,500.00 | $140,687.50 | $14,318.75 | $157,506.25 |
| 45 | $2,500.00 | $157,506.25 | $16,000.62 | $176,006.87 |
| 46 | $2,500.00 | $176,006.87 | $17,850.69 | $196,357.56 |
| 47 | $2,500.00 | $196,357.56 | $19,885.76 | $218,743.32 |
| 48 | $2,500.00 | $218,743.32 | $22,124.33 | $243,367.65 |
| 49 | $2,500.00 | $243,367.65 | $24,586.76 | $270,454.41 |
| 50 | $2,500.00 | $270,454.41 | $27,295.44 | $300,249.85 |
| 51 | $2,500.00 | $300,249.85 | $30,274.99 | $333,024.84 |
| 52 | $2,500.00 | $333,024.84 | $33,552.48 | $369,077.32 |
| 53 | $2,500.00 | $369,077.32 | $37,157.73 | $408,735.06 |
| 54 | $2,500.00 | $408,735.06 | $41,123.51 | $452,358.56 |
| 55 | $2,500.00 | $452,358.56 | $45,485.86 | $500,344.42 |
| 56 | $2,500.00 | $500,344.42 | $50,284.44 | $553,128.86 |
| 57 | $2,500.00 | $553,128.86 | $55,562.89 | $611,191.75 |
| 58 | $2,500.00 | $611,191.75 | $61,369.17 | $675,060.92 |
| 59 | $2,500.00 | $675,060.92 | $67,756.09 | $745,317.01 |
For the same example, if you started investing at 35 years old and reinvested the earnings, by 60 it would only grow to ~270,000. Those ten years account for ~$475,000.
| Rate of Return | 10% | |||
| Initial Investment | $2500 | |||
| Recurring Investments | $2500 | |||
| Age | Investment | Previous Year’s Total | Interest | End of Year Total |
| 35 | $2,500.00 | $0.00 | $250.00 | $2,750.00 |
| 36 | $2,500.00 | $2,750.00 | $525.00 | $5,775.00 |
| 37 | $2,500.00 | $5,775.00 | $827.50 | $9,102.50 |
| 38 | $2,500.00 | $9,102.50 | $1,160.25 | $12,762.75 |
| 39 | $2,500.00 | $12,762.75 | $1,526.28 | $16,789.03 |
| 40 | $2,500.00 | $16,789.03 | $1,928.90 | $21,217.93 |
| 41 | $2,500.00 | $21,217.93 | $2,371.79 | $26,089.72 |
| 42 | $2,500.00 | $26,089.72 | $2,858.97 | $31,448.69 |
| 43 | $2,500.00 | $31,448.69 | $3,394.87 | $37,343.56 |
| 44 | $2,500.00 | $37,343.56 | $3,984.36 | $43,827.92 |
| 45 | $2,500.00 | $43,827.92 | $4,632.79 | $50,960.71 |
| 46 | $2,500.00 | $50,960.71 | $5,346.07 | $58,806.78 |
| 47 | $2,500.00 | $58,806.78 | $6,130.68 | $67,437.46 |
| 48 | $2,500.00 | $67,437.46 | $6,993.75 | $76,931.20 |
| 49 | $2,500.00 | $76,931.20 | $7,943.12 | $87,374.32 |
| 50 | $2,500.00 | $87,374.32 | $8,987.43 | $98,861.76 |
| 51 | $2,500.00 | $98,861.76 | $10,136.18 | $111,497.93 |
| 52 | $2,500.00 | $111,497.93 | $11,399.79 | $125,397.73 |
| 53 | $2,500.00 | $125,397.73 | $12,789.77 | $140,687.50 |
| 54 | $2,500.00 | $140,687.50 | $14,318.75 | $157,506.25 |
| 55 | $2,500.00 | $157,506.25 | $16,000.62 | $176,006.87 |
| 56 | $2,500.00 | $176,006.87 | $17,850.69 | $196,357.56 |
| 57 | $2,500.00 | $196,357.56 | $19,885.76 | $218,743.32 |
| 58 | $2,500.00 | $218,743.32 | $22,124.33 | $243,367.65 |
| 59 | $2,500.00 | $243,367.65 | $24,586.76 | $270,454.41 |
Compound Interest Excel Template
Please see below a quick template that shows how to setup a quick lump sum investment and recurring investments compound interest calculator. I’ve taken the tables above and turned on “show formulas”, so you can create your own compound interest calculator.
To take advantage of a combination of both a lump sum initial investment and recurring investments, you just set the first cell to add the Initial Investment and Recurring Investments. The three values at the top are all inputs, everything else is calculated based off of those inputs. You can change the ages to whatever you want and the calculations should still hold true.
| Rate of Return | 0.1 | |||
| Initial Investment | 10000 | |||
| Recurring Investments | 0 | |||
| Age | Initial Investment | Previous Year’s Total | Interest | End of Year Total |
| 35 | =$D$4 | =E17 | =(C18+B18)*$D$3 | =C18+D18+B18 |
| 36 | =E18 | =(C19+B19)*$D$3 | =C19+D19+B19 | |
| 37 | =E19 | =(C20+B20)*$D$3 | =C20+D20+B20 | |
| 38 | =E20 | =(C21+B21)*$D$3 | =C21+D21+B21 | |
| 39 | =E21 | =(C22+B22)*$D$3 | =C22+D22+B22 | |
| 40 | =E22 | =(C23+B23)*$D$3 | =C23+D23+B23 | |
| 41 | =E23 | =(C24+B24)*$D$3 | =C24+D24+B24 | |
| 42 | =E24 | =(C25+B25)*$D$3 | =C25+D25+B25 | |
| 43 | =E25 | =(C26+B26)*$D$3 | =C26+D26+B26 | |
| 44 | =E26 | =(C27+B27)*$D$3 | =C27+D27+B27 | |
| 45 | =E27 | =(C28+B28)*$D$3 | =C28+D28+B28 | |
| 46 | =E28 | =(C29+B29)*$D$3 | =C29+D29+B29 | |
| 47 | =E29 | =(C30+B30)*$D$3 | =C30+D30+B30 | |
| 48 | =E30 | =(C31+B31)*$D$3 | =C31+D31+B31 | |
| 49 | =E31 | =(C32+B32)*$D$3 | =C32+D32+B32 | |
| 50 | =E32 | =(C33+B33)*$D$3 | =C33+D33+B33 | |
| 51 | =E33 | =(C34+B34)*$D$3 | =C34+D34+B34 | |
| 52 | =E34 | =(C35+B35)*$D$3 | =C35+D35+B35 | |
| 53 | =E35 | =(C36+B36)*$D$3 | =C36+D36+B36 | |
| 54 | =E36 | =(C37+B37)*$D$3 | =C37+D37+B37 | |
| 55 | =E37 | =(C38+B38)*$D$3 | =C38+D38+B38 | |
| 56 | =E38 | =(C39+B39)*$D$3 | =C39+D39+B39 | |
| 57 | =E39 | =(C40+B40)*$D$3 | =C40+D40+B40 | |
| 58 | =E40 | =(C41+B41)*$D$3 | =C41+D41+B41 | |
| 59 | =E41 | =(C42+B42)*$D$3 | =C42+D42+B42 |
| Rate of Return | 0.1 | |||
| Initial Investment | 0 | |||
| Recurring Investments | 2500 | |||
| Age | Investments | Previous Year’s Total | Interest | End of Year Total |
| 35 | =$K$5 | =L17 | =(J18+I18)*$D$3 | =J18+K18+I18 |
| 36 | =$K$5 | =L18 | =(J19+I19)*$D$3 | =J19+K19+I19 |
| 37 | =$K$5 | =L19 | =(J20+I20)*$D$3 | =J20+K20+I20 |
| 38 | =$K$5 | =L20 | =(J21+I21)*$D$3 | =J21+K21+I21 |
| 39 | =$K$5 | =L21 | =(J22+I22)*$D$3 | =J22+K22+I22 |
| 40 | =$K$5 | =L22 | =(J23+I23)*$D$3 | =J23+K23+I23 |
| 41 | =$K$5 | =L23 | =(J24+I24)*$D$3 | =J24+K24+I24 |
| 42 | =$K$5 | =L24 | =(J25+I25)*$D$3 | =J25+K25+I25 |
| 43 | =$K$5 | =L25 | =(J26+I26)*$D$3 | =J26+K26+I26 |
| 44 | =$K$5 | =L26 | =(J27+I27)*$D$3 | =J27+K27+I27 |
| 45 | =$K$5 | =L27 | =(J28+I28)*$D$3 | =J28+K28+I28 |
| 46 | =$K$5 | =L28 | =(J29+I29)*$D$3 | =J29+K29+I29 |
| 47 | =$K$5 | =L29 | =(J30+I30)*$D$3 | =J30+K30+I30 |
| 48 | =$K$5 | =L30 | =(J31+I31)*$D$3 | =J31+K31+I31 |
| 49 | =$K$5 | =L31 | =(J32+I32)*$D$3 | =J32+K32+I32 |
| 50 | =$K$5 | =L32 | =(J33+I33)*$D$3 | =J33+K33+I33 |
| 51 | =$K$5 | =L33 | =(J34+I34)*$D$3 | =J34+K34+I34 |
| 52 | =$K$5 | =L34 | =(J35+I35)*$D$3 | =J35+K35+I35 |
| 53 | =$K$5 | =L35 | =(J36+I36)*$D$3 | =J36+K36+I36 |
| 54 | =$K$5 | =L36 | =(J37+I37)*$D$3 | =J37+K37+I37 |
| 55 | =$K$5 | =L37 | =(J38+I38)*$D$3 | =J38+K38+I38 |
| 56 | =$K$5 | =L38 | =(J39+I39)*$D$3 | =J39+K39+I39 |
| 57 | =$K$5 | =L39 | =(J40+I40)*$D$3 | =J40+K40+I40 |
| 58 | =$K$5 | =L40 | =(J41+I41)*$D$3 | =J41+K41+I41 |
| 59 | =$K$5 | =L41 | =(J42+I42)*$D$3 | =J42+K42+I42 |
Why You Should Invest Now – Compound Interest
I hope the examples above demonstrate why it’s so important to invest as much as possible, as early as possible. The more time your money has to reinvest and generate compound interest the better off you’ll be financially.
When did you start investing?
If you’re looking for a way to get started, Robinhood is trading platform that offers $0 commission trades and gives you a free stock just for signing up. Visit Robinhood and get started investing today!