Lesson 3 of 4 · 7 min read
Compound interest: your strongest ally
Einstein is said to have called it “the eighth wonder of the world” (the legend is doubtful, the maths is not). See why time matters more than the amount when it comes to compound interest.
Simple interest is always calculated on the starting sum (the principal). Compound interest is calculated on the principal PLUS all the interest built up so far. The difference looks small in the short term, but becomes huge in the long term, because the interest in turn “earns” interest.
A concrete example
You have 10,000 RON (≈ €1,870) at 7% annual compound interest. After year 1: 10,700 RON (≈ €2,010). After year 2, interest is calculated on 10,700 RON (≈ €2,010) (not on 10,000), so you reach 11,449 RON (≈ €2,150), not the 11,400 you'd get with simple interest. The difference is small at first, but after 20 years you reach ≈ 38,700 RON (≈ €7,250) with compound interest, against only 24,000 RON (≈ €4,500) with simple interest.
The rule of 72: a handy mental shortcut
Want to estimate quickly how many years it takes a sum to double at a given interest rate? Divide 72 by the interest rate. At 6% annual interest, money doubles in about 72 / 6 = 12 years. At 9%, in about 8 years. It is an approximation, but good enough for quick decisions.
Why time beats amount
Someone who starts saving 500 RON (≈ €94) a month at 25 will build up, by 65 (40 years, at an average return of 7%), significantly more than someone who starts at 35 with 800 RON (≈ €150) a month (30 years). The reason: the first years of saving have the most time “at work” ahead of them for compounding. That is the main reason Step 5 insists on starting as early as possible, even with small sums.
Legal note
Educational content only. It is not investment advice. Your financial decisions are yours. Consult an ASF-authorised adviser for personal advice.
In short
- Compound interest is calculated on the sum plus the interest already earned.
- The rule of 72: 72 / the interest rate ≈ the years needed to double.
- Time matters more than the monthly amount: start early, even with a little.