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Compounding

Compounding is earning returns on your returns, so growth speeds up the longer you wait.

An example

At 8% a year, €10,000 becomes €10,800, then €11,664, then €12,597. Each year adds more than the last, because each year starts bigger.

Most of it comes late

Keep going and €10,000 becomes about €100,000 after 30 years. The last 10 years add more than the first 20 together. Stopping early costs the most.

The rule of 72

Divide 72 by the yearly rate to get roughly the years it takes to double. At 8%, about 9 years. At 4%, about 18.

It works both ways

Compounding also works against you: on a debt you do not pay down, and on a fee taken every year. The direction depends only on which side of the deal you are on.

Key takeaways

  • Growth on growth speeds up over time; most of it arrives late.
  • The rule of 72 gives a quick doubling time from a yearly rate.
  • The same force works against you on a debt or a fee.