What is Compound Interest?
Albert Einstein is infamously rumored to have called Compound Interest the "Eighth Wonder of the World." Whether he said it or not, the math holds true. Compound interest is the process of earning interest on your initial principal *and* on the accumulated interest from previous periods.
The Mathematics of Exponential Growth
The universal formula used by banks and index funds for compounding is:
A = P (1 + r/n)^(nt)
- A: Total Future Value
- P: Principal Investment
- r: Annual Interest Rate (Decimal format)
- n: Number of times compounded per year (e.g., 12 for Monthly)
- t: Number of years
When you introduce consistent Monthly Contributions to the portfolio, the formula loops recursively, exponentially accelerating the growth curve as each new deposit begins compounding alongside the existing base. This is the foundational mathematical principle behind 401(k) retirement accounts and long-term equity investing.