Albert Einstein may or may not have said it, but the principle holds: growth from compound interest is the reason people who invest young accumulate more than people who invest more but start later. The case for passive, low-cost index investing is best understood through The Little Book of Common Sense Investing — required reading for anyone who wants to understand why simple, broad-market funds beat nearly all active managers over 20+ year periods.
The Math
If you invest $500/month and earn an 8% average annual return:
- After 10 years: $78,000 invested → $90,000 total value
- After 20 years: $120,000 invested → $247,000 total value
- After 30 years: $180,000 invested → $567,000 total value
- After 40 years: $240,000 invested → $1.38 million
The last decade adds more than the first three combined. That is the power of compounding.
What Determines Your Return
Three things: time in the market (not timing the market), the asset allocation mix (stocks vs. bonds), and fees. A 1% expense ratio difference on a $500/month investment over 30 years costs you $110,000 in foregone growth.
Rule of 72
To estimate how long it takes to double your money: divide 72 by your annual return rate. At 8%, doubling takes 9 years. At 6%, 12 years. Simple and useful for quick estimates.