How compound interest works
Compound interest is earning returns on your returns. In year one, a $10,000 investment at 7% grows to $10,700. In year two, the 7% applies to $10,700, not the original $10,000 — producing $749 rather than $700. The difference seems small, but over decades it becomes enormous.
After 10 years, $10,000 at 7% becomes $19,672. After 20 years, $38,697. After 30 years, $76,123. The same $10,000 invested. No additional contributions. The doubling happens approximately every 10 years at 7% — a rule of thumb called the Rule of 72 (72 ÷ interest rate = years to double).
Why starting early matters more than investing more later
A 25-year-old who invests $5,000 per year for 10 years (total: $50,000) and then stops will often end up with more money at 65 than a 35-year-old who invests $5,000 per year for 30 years (total: $150,000) — because the early investor gets 40 years of compounding instead of 30. The 10-year head start is worth more than 3x the contributions.
This is the fundamental argument for starting your FIRE savings as early as possible, even at a modest level. Every year of delay shrinks your compounding runway.
Index funds and compound growth
The most accessible way to capture compound growth is through low-cost index funds. A total market index fund reinvests dividends automatically, compounds across thousands of companies, and charges minimal fees. A 0.05% expense ratio vs a 1% expense ratio on a $500,000 portfolio over 20 years is a difference of over $100,000 in ending wealth, purely from reduced fee drag on compounding.
Compounding works against you too
Compound interest accelerates debt in the same way. A credit card balance at 20% annual interest compounds just as relentlessly as a stock portfolio at 7%. Paying off high-interest debt is a guaranteed compound return equal to the interest rate — which typically beats expected market returns on a risk-adjusted basis.
Practical implications for FIRE planning
The core discipline is simply to keep money invested and resist the urge to time the market or hold excess cash. Time in the market — staying invested through downturns — is the primary driver of compound growth outcomes. Missing the 10 best market days in a given decade, by trying to avoid volatility, typically cuts long-run returns by 30–50%. Consistency beats cleverness for compound growth.