← Back to Hub

The Magic of Compound Interest

There's a quote floating around forever — “compound interest is the eighth wonder of the world” — usually credited to Einstein, though nobody has ever found a source. Doesn't matter. Whoever said it was right. Once the math behind compounding actually clicks for you, it changes the way you look at every purchase you make and every dollar you don't invest.

What Exactly is Compound Interest?

Let's start with the boring version first. Simple interest pays you a flat rate on your original deposit—same amount, year after year. Put in $1,000 at 5% simple interest and you get $50 every year. Ten years later? Still $50. Nothing changes.

Compound interest is different. It pays you on your original deposit plus the interest you've already earned. So year one, you get $50 on your $1,000. But year two, you earn 5% on $1,050—that's $52.50. Year three, 5% on $1,102.50. Doesn't sound like much, right? Give it 20 or 30 years and it turns into a snowball rolling downhill. Your money starts earning more than you do.

The Rule of 72

Here's a handy shortcut you can do in your head. Take the number 72 and divide it by whatever return you expect. The answer is roughly how many years until your money doubles.

• At a conservative 6% return: 72 / 6 = 12 years to double.
• At an aggressive 10% return: 72 / 10 = 7.2 years to double.

So if you dropped $10,000 into the market at age 20 and got 10% returns, you'd have $20k by 27. $40k by 34. $80k by 41. By 62? Over $640,000—and you never added another dime. That's the part that blows people's minds.

The Cost of Waiting (The Hockey Stick Curve)

If you plot compound interest on a graph, it looks like a hockey stick. For the first decade or so, the line is basically flat. You're grinding away, saving money, and the interest feels like pocket change. Then somewhere around year 15, the curve goes almost vertical. Your account starts generating more in interest than you're even putting in.

And because all the big growth happens at the end, starting early matters way more than starting big. Someone putting away $200 a month at 20 will almost certainly retire richer than someone starting at 40 with $500 a month. Those extra 20 years of compounding are worth more than the extra cash.

Don't Let it Work Against You

Compounding doesn't care which side of the ledger you're on. At 22% APR, a credit card is running the exact same math against you that an index fund runs in your favor — except the credit card rate is higher than anything you can reliably earn in the market. Paying off high-interest debt before investing isn't conservative advice, it's just arithmetic. The return is guaranteed and better than average market returns. That combination doesn't exist anywhere else.

Where to Let it Work For You: Tax-Advantaged Accounts

Compounding on its own is already powerful. But inside a tax-advantaged account, it goes into overdrive. These are legal government structures—they either defer or completely eliminate taxes on your investment gains.

• RRSP: Contributions lower your taxable income right now. Gains grow tax-deferred until you retire. And if your employer matches? Contribute at least enough to get the full match — that's free money—an instant 50–100% return.
• TFSA: You contribute money you already paid tax on, but everything it earns—and every dollar you withdraw in retirement—is completely tax-free. Every cent of compound interest is yours to keep.

Over 30 years, the difference between a regular brokerage account and a TFSA on the exact same investments can be hundreds of thousands of dollars in taxes you never have to pay. Fill these accounts first.

What to Actually Do With This

Understanding compounding is the easy part. Sequencing what you do with the money is where people get tripped up. Credit card debt goes first — the interest rate is eating you faster than any investment can grow you. After that, a 3-month emergency fund so that a car repair or a lost job doesn't force you to sell investments at the worst possible time. Then grab any employer RRSP match that's on the table, because that's an immediate 50–100% return that no investment can match on day one. Open a TFSA after that — Wealthsimple, Questrade, TD Direct, whichever — and max it out for the year. Pick a broad index fund, set up automatic monthly contributions, and then genuinely leave it alone. Years. Decades if possible. The math only works if you don't interrupt it.