Question 1

What is compound interest and how does it work?

Accepted Answer

Compound interest is interest earned on both your initial deposit and on previously earned interest. Unlike simple interest, which only applies to your principal, compound interest accelerates your growth over time. For example, $10,000 at 5% compounded annually becomes $10,500 after year one, then $11,025 after year two because you earn interest on the $500 from year one.

Question 2

How does compounding frequency affect my returns?

Accepted Answer

More frequent compounding means slightly higher returns. Daily compounding earns more than monthly, which earns more than yearly. However, the difference is often small. For example, $10,000 at 5% for 10 years yields $16,289 compounded annually vs. $16,487 compounded daily — a difference of about $198 over a decade.

Question 3

How much should I invest monthly to reach $1 million?

Accepted Answer

It depends on your time horizon and expected return. At a 7% annual return compounded monthly, you would need to invest about $381/month for 40 years, $820/month for 30 years, or $2,048/month for 20 years to reach $1 million. Starting early makes a dramatic difference thanks to compound interest.

Factor	Impact
Starting early (time in market)	10 extra years can double your final balance
Monthly contributions	$500/mo at 7% for 30 yrs = $567k in contributions, $1M+ total
Compounding frequency	Daily vs. yearly: small difference (~0.5% more over 10 yrs)
Interest rate	Each 1% increase compounds dramatically over decades
Reinvesting dividends	Historically adds 2-3% annual return to stock investments

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