Compounding, or compound interest, is interest computed on the accumulated unpaid interest as well as on the original investment. The chart below compares two 25-year-olds who both contribute $200 per month to their company retirement plan and receive an 8% annual rate of return compounded monthly. Cynthia contributes for 10 years and then stops.Todd waits 10 years and contributes until his retirement at age 65. Even though Todd contributed more money than Cynthia, his savings will never catch up with hers because her money earned interest for 40 years compared to his 30.
Savings
Saving
Contributed
Contributed
at Age 65
Cynthia
$2,400
25
10
$24,000
$368,183
Todd
$2,400
35
30
$72,000
$298,072