What is the relationship between investment and "compound interest"?

Hello! I'm really excited to discuss this topic—it's one of the core concepts on the path to wealth accumulation. Let's ditch the jargon and talk in plain language.

What’s the Relationship Between Investing and "Compound Interest"?

Imagine rolling a snowball:

Investing: This is the act of starting to roll the snowball. You first need to find a snowy slope (that's the investment market), form a small snowball with your hands (that's your principal), and give it a push to get it rolling. If you don't push it, the snowball remains a tiny lump—it might even melt over time (inflation).
Compound Interest: This is the magical effect where the snowball grows bigger and rolls faster as it moves downhill. Each rotation picks up new snow, making the snowball larger; the larger snowball then picks up even more snow on the next rotation. This "interest earning interest" process is compounding.

So, their relationship is straightforward:

Investing is the action of starting and keeping the snowball rolling, while compound interest is the result of that rolling action. Without the action of investing, the effect of compounding cannot happen.

Let's break this down further:

## 1. What is "Compound Interest"? — The Snowball's "Magic"

Simply put, compound interest is "interest earning interest." The money you earn becomes part of your new principal, helping you earn even more money.

Here's an example:

Suppose you have 10,000 yuan with an annual return of 10%.

Simple Interest:
- Year 1: You earn 10,000 * 10% = 1,000 yuan.
- Year 2: You still calculate based on the original principal, earning another 1,000 yuan.
- After 10 years: You’ve earned 1,000 * 10 = 10,000 yuan total. Principal + interest = 20,000 yuan.
Compound Interest:
- Year 1: You earn 1,000 yuan. Your total becomes 11,000 yuan.
- Year 2: Your principal is now 11,000! So you earn 11,000 * 10% = 1,100 yuan.
- Year 3: Your principal is 12,100 yuan, earning 1,210 yuan...
- After 10 years: Your total grows to 25,937 yuan.

See the difference? The longer the time, the bigger the disparity. This is the magic of compounding, something Einstein called the "eighth wonder of the world."

## 2. What is "Investing"? — The Snowball’s "Vehicle"

In that example, where did the annual 10% return come from? Not from a bank savings account, and it certainly didn’t materialize under your pillow.

That 10% return is earned precisely through the act of "investing."

You can invest your money by:

Investing in great companies (buying stocks)
Investing in a basket of companies (buying funds)
Investing in real estate (buying property for rent or appreciation)
Investing in your own business...

These actions involve putting your money (principal) into a place that "generates more money," providing returns. This "place" is the vehicle of the investment, and "investing" is the process itself.

## Summing up Their Inseparable Relationship

Investing is the cause, Compounding is the effect: You must first make the decision and take action to invest to have a chance at enjoying the sweet results of compounding.
Investing is the engine, Compounding is the fuel: Investing is like a car's engine, getting your wealth moving. Compounding is like the fuel tank refilling itself as the car moves, enabling it to travel farther and faster over time. 🚀

## How to Make Your "Investment" Achieve Better "Compounding"?

To make your snowball grow bigger and roll faster, remember these three key elements:

A large enough starting snowball (principal): The more principal you have, the higher your starting point. Under the same conditions, it will naturally roll (grow) faster.
Wet enough snow (rate of return): A higher rate of return means more snow sticks to the ball, accelerating growth. This doesn't mean taking extreme risks, but rather seeking a long-term, stable, and reasonable rate of return.
A long enough slope (time): ⏳ This is the absolutely most critical point! Even if your principal is modest and your rate of return is only average, compound interest will unleash stunning power if you give it enough time. That’s why it’s best to start investing as early as possible.

Finally, as Naval Ravikant pointed out, compounding applies not just to money, but also to your knowledge, health, and relationships. Improve just a little bit each day, persist over the long run, and your life will also reap immense rewards—just like a rolling snowball.

So, don’t hesitate. Start planning your investments today and let the magic of time work for you!

Hope this explanation helps!