Visualizing the Insane Impact of Compound Interest in Later Years


If you invest $10,000 and earn a 7% annual return for 30 years, you would end up with just over $76,000:

During the first 10 years, your investment would grow from $10,000 to just over $19,000:

During the second 10 years, your investment would grow from $19,000 to a little over $38,000:

And during the final 10 years, your investment would grow from $38,000 to a little over $76,000:

So, during the first 20 years, your investment would grow by $28,000, but in the final 10 years your investment would grow by $38,000.

This is the nature of compound interest. A huge chunk of the total growth comes in the later years.

The Insane Tail End of Compound Interest

The numbers are even more amazing if we look at the growth of the last 5 years. From year 25 to year 30, your investment would grow by about $22,000, which is the same amount of growth as the first 17 years:

And in the final year alone, your investment would grow by about $5,000, which is the same amount of growth as the first six years combined:

The Impact of Compound Interest Over Longer Time Horizons

If we extend our time horizon to 40 years, the numbers become even more mind-boggling.

Consider the same $10,000 investment that earns a 7% annual rate of return. After 40 years, it would grow into $150,000:

During the final five years, your investment would grow by about $43,000, which is the same amount of growth as the first 25 years:

And in the final year alone, your investment would grow by about $10,000, which is the same amount of growth as the first 10 years combined:

That’s incredible.

The lesson here is simple: compound interest is not intuitive. Most of us think in linear terms, not exponential terms, which is why it’s so hard for us to comprehend just how powerful compound interest can be in later years.

As an investor, it helps to know that the slow growth during the early years will be rewarded with mind-boggling growth in the later years.

 

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