Getting StartedWhat is Compound Interest
Compound interest is the addition of interest to the principal sum. In other words, it is interest on interest.
It is the result of reinvesting interest or earnings automatically. This is the single most important factor in saving for FIRE.
For example, if you invest $10,000 per year for 10 years with a return of 5% you will have $125,779 instead of $100,000 at the end of 10 years compounding annually.
This is important because what it means is you don’t need to actually save the total goal amount. Reinvesting returns will compound and get you there quicker.
For example, if my FIRE goal is $1,500,000 which will provide a safe withdrawal amount of $50,000 – $60,000, over a 20 year period you will directly invest approximately $650,000 and compound returns will take care of the rest.