"Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it." - Albert Einstein. I’m always amazed by the mechanics and impact of the compounding effect. The basic compound interest formula is:- Where: F = Future value or final value of the investment P = Principal or the starting capital r = Annual rate of return t = The number of years this return is compounded To let the compounding effect work its wonder, an investor needs to focus on the Starting Capital (denoted by P), Annual rate of return (r) and the number of years (t). Let’s use $100,000 starting capital, 10% annual return and 20 years as baseline inputs for comparisons with other permutations. For simplicity, effects of inflation are neglected throughout.

Effects of Compounding with Various Inputs

As observed from the table and chart, for all ......