How does compound interest work, and why does starting to save early matter so much?

Compound interest is essentially "interest on interest."

When you save money, you earn interest on your initial deposit (the principal). In the next period, you earn interest not just on that original money, but also on the interest you earned previously. Over time, this creates a snowball effect where your balance grows at an accelerating rate.

Why starting early matters so much:

1. The Time Factor: Compound interest is exponential, not linear. The final years of a long-term investment are when the growth is most dramatic because the "base" amount you are earning interest on has become so large. Starting early gives that growth more time to compound.
2. Less Effort: If you start early, you don’t need to save as much of your own money to reach a specific goal. Because your money is doing the "heavy lifting" by growing itself, your individual contributions have a smaller burden.
3. The "Cost" of Waiting: If you delay saving, you lose those critical early years of compounding. To catch up, you would have to contribute significantly more money later in life to reach the same result, because you’ve missed out on the period where the growth is most powerful.

In short, time is the most valuable asset in investing. Even small amounts saved early can eventually outpace larger amounts saved later, simply because they have more time to multiply.