Day 5: Compound growth and the importance of time

By the end of this lesson you can

Calculate compound growth
See why starting early matters
Understand how fees and withdrawals interrupt compounding

Growth on growth

Compounding means earning returns on your previous returns. $1,000 growing 7% a year becomes $1,070 after one year, then $1,144.90 after two, because the second year’s 7% applies to $1,070, not to $1,000.

The formula is: future value = starting amount × (1 + rate)^years.

Time does the heavy lifting

At 7% a year, money roughly doubles every 10 years. A handy shortcut, the rule of 72, estimates doubling time as 72 ÷ the annual rate: 72 ÷ 7 ≈ 10.3 years.

This is why starting early matters so much. Ten extra years at the start can matter more than larger contributions later.

Regular contributions

Adding a fixed amount every month, sometimes called dollar-cost averaging, builds the habit and means you buy more shares when prices are low and fewer when prices are high.

It does not guarantee a profit or protect against losses in a falling market, but it removes the pressure of picking a perfect moment.

What breaks compounding

Fees, taxes, and selling in a panic all interrupt compounding. A 1% yearly fee sounds small, but over 30 years it can reduce the final balance by roughly a quarter compared with a 0.05% fee.

Real returns are never a smooth 7% a year. Calculators show averages; actual paths include bad years.

Two savers

Saver A invests $200 a month from age 25 to 35, then stops. Saver B invests $200 a month from age 35 to 65. Assuming 7% a year, A contributed $24,000 and B contributed $72,000.

At 65, A has about $281,000 and B has about $244,000. Ten early years beat thirty later ones, because A’s money had longer to compound. These are illustrations with a constant 7% return compounded monthly, not forecasts.

Try it in VEXA

Practise with virtual money over time →

Real data, so the numbers will differ from the lesson’s examples.

Key terms

Compounding: Earning returns on both your original money and on returns already earned.
Rule of 72: A shortcut: 72 divided by the annual return roughly gives the years needed to double.
Dollar-cost averaging: Investing a fixed amount at regular intervals regardless of price.
Inflation: The general rise in prices, which reduces what money can buy.
Real return: Return after subtracting inflation.

Full glossary →

Knowledge check · 4 questions

1$2,000 grows at 10% a year for two years with no withdrawals. What is it worth? $2,400 $2,420 $2,500 $2,200

2Using the rule of 72, about how long does money take to double at 6% a year? 12 years 18 years 72 years 6 years

3Why does starting to invest earlier help so much? Markets only rise for young people Early investments are guaranteed Fees are lower for young investors Money has more years to compound

4Which statement about dollar-cost averaging is true? It guarantees a profit It avoids all losses It only works with bonds It buys more shares when prices are lower and fewer when higher

Try it

Use the calculator above with your own numbers. Then change only the fee and note how much the 30-year balance changes.

Key takeaways

Compounding is growth on growth; time is its fuel.
The rule of 72 estimates doubling time.
Regular investing builds the habit and smooths entry prices.
Fees, taxes and panic selling interrupt compounding.