Compound growth, explained with one cup of coffee

Compound growth sounds complicated. It isn't. It simply means your money earns returns, and then those returns earn returns of their own.

A simple example

Say you put away the price of a daily coffee, about $5 a day, or roughly $150 a month. If that money grew at an average of 6 percent a year, after 10 years you'd have about $24,000. After 30 years, about $150,000. You'd have contributed about $54,000. The rest is growth on growth.

These numbers are for illustration only. Real returns go up and down, sometimes sharply, and are never guaranteed.

Why starting early matters

The biggest ingredient in compounding is time. Money invested in your twenties has decades to grow. Money invested in your fifties has far fewer. That's why even small amounts early can beat larger amounts later.

What slows compounding down

• High fees, which take a cut of your growth every year
• Withdrawing early, which resets the clock
• Selling in a panic when markets fall, then missing the recovery

How to use it

Start now, even with a small amount. Automate it so you don't have to decide each month. Raise the amount whenever your income goes up. Then leave it alone.

The best time to start was years ago. The second-best time is today.