Learn / Part 1 · How Money Works
The Price of Time: Interest and Compounding
How does time turn small amounts into large ones, or small debts into heavy ones?
In brief
Compounding means growth builds on earlier growth. It rewards patience for savers and punishes delay for borrowers; the exact same mathematics works for and against you.
Key ideas
Time beats timing
Starting early or staying longer usually matters more than the exact return you can achieve.
Make an insight card →The rule of 72
Divide 72 by a yearly return to estimate years to double: a quick way to feel the effect of a rate.
Make an insight card →Rates are not what they seem
The same quoted rate costs different amounts depending on how often interest is added. Compare effective rates.
Make an insight card →Try it
Compounding & time
Time does most of the work in saving, and most of the damage in borrowing. Enter a starting sum, a monthly amount, a return and a horizon.
Open the full page: formula, variables, worked example and cautions →
Also relevant: Rate translator
Red flag
A pitch that stresses the monthly figure and never the number of years.
Ask before you sign
- What is the effective annual rate?
- How long does this run, and what happens to the cost the longer it runs?
Do this week
Use the compounding tool to see what your monthly saving becomes in 10, 20 and 30 years.
Try it · 10–45 minutes
Work out how long your savings would take to double at 4%, 6% and 8%.
Pause and reflect
Private to this device. Nothing is sent anywhere.
Words worth knowing
- Compounding
- Earning (or paying) interest on interest. Growth builds on earlier growth, which is why time is so powerful for savers and so costly for borrowers.
- Effective annual rate (EAR)
- The rate that a year of borrowing or saving really adds up to once compounding is included.
- Rule of 72
- A shortcut: divide 72 by the yearly percentage return to estimate how many years it takes to double.
- Interest
- The price of using money: what a borrower pays and a saver earns.
Companion notes written for this website, based on the topics of Chapter 3. They explain ideas and do not reproduce the book. General information, not personal advice.