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Beginner · Lesson 3 of 8

Compounding: the eighth wonder

5 minute read · By Krishna Avadhani, Vestora Academy · Updated 18 October 2026

Compounding means earning returns on your past returns. If $10,000 grows 7% a year, it becomes $10,700 after one year, but about $19,700 after ten years and about $76,100 after thirty. Most of the growth arrives late, which is why starting early matters more than starting big.

The Rule of 72 is a quick shortcut: divide 72 by the yearly return to estimate how many years it takes to double. At 8% money doubles in about 9 years; at 4% about 18 years.

Compounding also works against you. Fees of 1% a year look small but can take more than a fifth of your final balance over 30 years.

Formula

Future value = P x (1 + r)^n
Rule of 72: years to double = 72 / r(%)

Example: $5,000 at 8% for 25 years = 5,000 x 1.08^25 = about $34,240.

Key takeaways

  • Time is the most powerful input to compounding.
  • Rule of 72: years to double = 72 / return %.
  • Fees compound too, against you.

Check your understanding

1. Using the Rule of 72, roughly how long does money take to double at 6% a year?

  • 6 years
  • 12 years
  • 18 years
  • 72 years
Show the answer

12 years. 72 / 6 = 12 years.

2. Why do small yearly fees matter so much over decades?

  • They are charged only once
  • They reduce the amount that compounds every year
  • They are tax deductible
  • They do not matter
Show the answer

They reduce the amount that compounds every year. Every dollar taken in fees stops compounding for all later years.

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General education only, not financial advice. Examples are illustrations. Rules, tax settings and products change; check official sources.