Albert Einstein reputedly called compound interest the "eighth wonder of the world." It is the principle that allows your money to earn money, and then for those earnings to earn even more money.
Time is Your Best Friend
The key variable in compounding is time. If you invest $5,000 a year starting at age 25, you will have significantly more at age 65 than someone who starts investing $10,000 a year at age 45, simply because your money has had more time to grow.
The Rule of 72
A quick way to estimate how long it takes to double your money is the Rule of 72. Divide 72 by your annual interest rate. If you get an 8% return, your money doubles in 9 years (72 / 8 = 9).
The Impact of Fees
Just as interest compounds, so do fees. A 1% annual fee might sound small, but over 30 years, it can eat up tens of thousands of dollars of your potential returns. Always look for low-cost index funds or ETFs to maximize the power of compounding.
Starting Late?
If you feel like you've missed the boat, don't panic. The second best time to plant a tree is today. You may need to save a higher percentage of your income to catch up, but compounding will still work in your favor from this day forward.