How Compound Interest Works: Building Wealth Over Time

How Compound Interest Works: Building Wealth Over Time

Why Understanding Compound Interest Can Change Your Financial Future (And Why You Should Listen to Me)

Building wealth can feel overwhelming—especially if you’re just starting out. But what if I told you that $100,000 could do most of the heavy lifting for you? Yes, saving money is important, but the real magic happens when time and compound interest start working in your favor.

In this article, we’ll explore how saving your first $100K can accelerate your journey to financial freedom. We’ll break down simple strategies to get there faster—whether you’re single, married, or aiming to hit that milestone within 5 years.

I’m Ben Loughery, CFP®, and I’ve worked with countless clients at different stages of their financial journeys. In my experience, those who harness the power of compound interest early often end up wealthier than those who chase quick wins or high-risk investments.

👉 Want to learn how to retire without the worry of running out of money in retirement? Click here to watch this video 

The Power of Compound Interest (And Why Time Matters More Than Timing)

What is Compound Interest?

Compound interest is interest that grows on top of interest. It’s like planting a tree that not only grows but produces leaves that keep multiplying. Over time, the growth accelerates—the longer you wait, the fuller and larger the tree becomes.

Albert Einstein once called compound interest the “eighth wonder of the world.”

Why $100K is the Sweet Spot

Hitting your first $100K is crucial because, after that, compound interest takes over. Saving the next $100K happens faster, often with less effort.

Let’s break this down:

  • If you invest $100,000 in the stock market with an average return of 10% per year (historical S&P 500 return), your investment could double every 7.2 years using Rule 72.
  • After 7.2 years, your $100K becomes $200K.
  • In 14 years, that grows to $400K—without adding another dollar.


In my experience, clients who push to reach $100K quickly often see their wealth snowball faster, while others struggle to gain momentum.

👉 Source: Historical Stock Market Returns - S&P 500

The Rule of 72: Doubling Your Money

The Rule of 72 is a simple way to estimate how long it takes for your money to double at a given interest rate.


Formula:

72 ÷ Annual Return % = Years to Double

Example:

If you expect a 10% return, your money will double in:

72 ÷ 10 = 7.2 years

At 6% returns, it doubles in 12 years.

Getting to $100K Faster: Practical Strategies

1. Automate Your Savings

One of the fastest ways to reach $100K is by “paying yourself first.” Set up automated transfers to your investment or savings account right after each paycheck.

If you invest $500/month at 10% interest, you’ll have:

• $77,000 in 10 years

• $200,000 in 20 years

In my experience, automating savings removes the emotional decision of whether to invest or spend.

2. Maximize Tax-Advantaged Accounts

Use accounts like:

• 401(k) – Tax-deferred growth with employer matching. 

• Roth IRA – Tax-free growth for long-term investments.

• HSA (Health Savings Account)– Save for medical expenses with tax benefits.

👉 Source: Types of Retirement Plans

3. Side Hustles and Extra Income Streams

A side hustle, part-time gig, or freelancing can accelerate your savings.

I’ve worked with clients who used side gigs to stash away an extra $10,000 a year—hitting $100K twice as fast.

What Happens After $100K?

Once you hit $100K, the heavy lifting shifts to your investments.


If you’re still saving $50/month after reaching that mark, it won’t have the same immediate impact as larger contributions of $100, $200, or $300 per month. However, continuing to invest—even small amounts—still matters.

  • At this stage, you may want to:
    • Consider redirecting funds to pay down debt.
    • Build a rainy-day fund.
    • Contribute to new investments or real estate.

In my experience, these steps are valuable even before you reach $100K, if possible. Prioritizing them along the way can create a stronger overall financial foundation while allowing your investments to compound over time

Case Study: Ronald Read – The Janitor Who Amassed $8M

Ronald Read, a Vermont janitor, quietly amassed $8 million by consistently investing in blue-chip stocks. His wealth was built by:

• Reinvesting dividends.

• Holding long-term positions in companies like AT&T and Johnson & Johnson.

👉 Source: CNBC on Ronald Read

Tax Efficiency: Why ETFs Often Beat Mutual Funds

When investing in taxable accounts, choosing the right investment vehicle can significantly impact returns.

• Mutual Funds: Pass capital gains to investors annually, resulting in taxes even if you don’t sell shares.

• ETFs (Exchange-Traded Funds): More tax-efficient, with fewer taxable distributions due to in-kind redemptions.

Example Scenario:

• Mutual Fund (10% return): After taxes, net growth = 8%

• ETF (10% return): Net growth = 9.5%

Over 20 years, the difference can add tens of thousands of dollars to your portfolio.

👉 Source: ETFs Versus Mutual Funds


Common Questions on Compound Interest (FAQs)

1. Is It Too Late to Start Investing at 40 or 50?

  • No. Even at 50, with 15-20 years until retirement, compound interest can significantly grow your wealth.
  • Example:
  • $1,000/month invested at 8% from age 50 to 65 = $293,000
  • Waiting 5 years reduces this to $189,000.
  • 👉 Start Now: The earlier you begin, the better.

2. Should I Pay Off Debt or Invest?

  • High-Interest Debt (Above 7%) – Pay this off first.
  • Low-Interest Debt (Below 5%) – Invest while paying it down gradually.
  • In my experience, balancing debt payments with investments yields the best long-term results.

3. How Much Do I Need to Invest Monthly to Reach $100K in 5 Years?

  • To reach $100K in 5 years at 10% returns:
  • $1,500/month.
  • If investing in a 401(k) with employer matching, you can accelerate this further.


👉 Want to learn how to retire without the worry of running out of money in retirement? Click here to watch this video 

Conclusion

Compound interest is a powerful tool that rewards patience and consistency. Whether you’re saving for retirement, a home, or financial independence, the key is to start early and stay consistent.

By focusing on hitting that first $100K milestone, automating your savings, and investing wisely, you set yourself up for long-term financial success.

In my experience, clients who understand and trust the process of compound interest are far more likely to achieve their financial goals—regardless of their starting point.

The best day to start was yesterday. The second-best day is today.


Disclaimer: Case studies are hypothetical and do not relate to an actual client of Lock Wealth Management. Clients or potential clients should not interpret any part of the content as a guarantee of achieving similar results or satisfaction if they engage Lock Wealth Management for investment advisory services.