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What Is Compound Interest?
Compound interest is earning interest on your interest. It's the snowball effect of money—small amounts grow into larger sums over time as your returns generate their own returns.
Unlike simple interest (which only pays on your original investment), compound interest accelerates your wealth growth exponentially over time.
A Simple Example
Imagine investing $10,000 with a 7% annual return:
- Year 1: $10,000 → $10,700 (earned $700)
- Year 5: $10,000 → $14,025 (earned $4,025 total)
- Year 10: $10,000 → $19,672 (nearly doubled)
- Year 20: $10,000 → $38,697 (almost quadrupled)
- Year 30: $10,000 → $76,123 (over 7x your original)
Notice how the growth accelerates over time. The first decade earned about $9,700, while the third decade alone earned over $37,000.
The Three Factors That Matter
1. Starting Amount
The more you start with, the more you have working for you. But don't be discouraged by a small starting point—time can make up for a modest beginning.
2. Rate of Return
Higher returns compound faster, but they usually come with higher risk. A balanced approach seeking 5-7% returns is often appropriate for retirees.
3. Time
Time is the most powerful factor. This is why starting early matters—but it's also why continuing to invest in your 50s, 60s, and beyond still makes sense.
Compound Interest in Tax-Sheltered Accounts
In a TFSA or RRSP, your investments compound without annual taxation eating into your returns. This turbocharges the compounding effect:
- TFSA: Compound completely tax-free—withdraw without tax impact
- RRSP: Compound tax-deferred—pay tax only on withdrawal
💡 Note: Even if you're starting later in life, compound interest still works. A 55-year-old investing until 75 has 20 years of compounding potential.
Making Compound Interest Work for You
- Start now—every day of delay costs you compound growth
- Reinvest dividends automatically
- Stay invested through market ups and downs
- Use tax-advantaged accounts to maximize compounding
- Keep investment fees low—they eat into your returns
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About Maple Wealth Guide
Maple Wealth Guide is an independent Canadian financial education website. Our team of educational writers researches and explains investment concepts, retirement-related topics, and personal finance information for Canadians aged 50 and over. We are not licensed financial advisors and do not provide personalized recommendations. All content is for educational purposes only.