The Magic of Compound Interest 2026

"Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it." — Albert Einstein (attribution unverified)

Let's say you earn 3 million won per month and save 500,000 won monthly. How much will you have after 10 years?

• Simple savings: 60 million won
• 5% annual compound interest: approximately 77.64 million won
• 8% annual compound interest: approximately 91.47 million won

Even with the same savings amount, compound interest creates an additional 17.64 to 31.47 million won. This is the power of compound interest.

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Simple Interest vs Compound Interest

Simple Interest

Interest is calculated only on the principal

Interest = Principal × Interest Rate × Period
Total = Principal + Interest

Example: 10 million won, 5% annual rate, 3 years

Annual interest: 10 million × 0.05 = 500,000 won
3-year total interest: 500,000 × 3 = 1.5 million won
Final amount: 10 million + 1.5 million = 11.5 million won

Compound Interest

Interest is calculated on principal + accumulated interest (interest on interest)

Total = Principal × (1 + Interest Rate)^Period

Example: 10 million won, 5% annual rate, 3 years

After 1 year: 10 million × 1.05 = 10.5 million won
After 2 years: 10.5 million × 1.05 = 11.025 million won
After 3 years: 11.025 million × 1.05 = 11.57625 million won

Or: 10 million × (1.05)³ = 11.57625 million won

Comparison

(Unit: 10,000 won, based on 10 million won principal)

The longer the time period, the more dramatically compound interest grows.

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Compound Interest Formula

Basic Formula

A = P × (1 + r/n)^(n×t)

A = Final Amount
P = Principal
r = Annual Interest Rate
n = Compounding Frequency per Year
t = Time Period (years)

Difference by Compounding Frequency

Principal 10 million won, 12% annual rate, 1 year

More frequent compounding results in slightly more interest.

Continuous Compounding (Theoretical Limit)

A = P × e^(r×t)

e ≈ 2.71828 (Euler's number)

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Rule of 72

Calculating the time for principal to double

Years to double ≈ 72 ÷ Interest Rate (%)

Examples

Application:

• 7% annual return → doubles roughly every 10 years
• 30-year investment → 8x growth (2³)

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Regular Investment Compound Calculation

Monthly Investment Formula

FV = P × [((1 + r/n)^(n×t) - 1) / (r/n)]

FV = Future Value
P = Monthly Investment Amount
r = Annual Interest Rate
n = Compounding Frequency per Year (usually 12)
t = Time Period (years)

Practical Example

500,000 won monthly, 6% annual rate, 20 years

FV = 500,000 × [((1 + 0.06/12)^(12×20) - 1) / (0.06/12)]
FV = 500,000 × [((1.005)^240 - 1) / 0.005]
FV = 500,000 × [(3.31 - 1) / 0.005]
FV = 500,000 × 462
FV ≈ 231 million won

Total principal: 500,000 × 12 × 20 = 120 million won
Interest earned: approximately 110 million won (almost equal to principal!)

Comparison by Investment Period

500,000 won monthly, 7% annual rate

(Unit: million won)

After 20+ years of investing, interest exceeds principal!

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Real Investment Returns

Historical Returns by Asset Class

Real Returns

Real Return = Nominal Return - Inflation

Nominal 5% - Inflation 3% = Real 2%

Note: If deposit rates are lower than inflation, your real wealth decreases.

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Simulation Scenarios

Scenario 1: Retirement Fund

Goal: 1 billion won after 30 years Annual Return: 7%

Required monthly savings calculation:

1 billion = P × [((1.07/12)^360 - 1) / (0.07/12)]
1 billion = P × 1,219
P = 1 billion / 1,219
P ≈ 820,000 won/month

Scenario 2: The Power of Starting Early

A: Saves 500,000 won monthly from age 25-35 (10 years), then leaves it until age 65 B: Saves 500,000 won monthly from age 35-65 (30 years) Return: 7% annually

A (10 years saving + 30 years growth):
- Age 35: 86.03 million won
- Age 65: 86.03M × (1.07)^30 = 655 million won

B (30 years saving):
- Age 65: 607 million won

A saves less than B but ends up with more money!

Conclusion: Starting early is more powerful than saving for longer.

Scenario 3: The 1% Difference in Returns

500,000 won monthly, 30 years

A 1% difference in returns creates hundreds of millions of won difference after 30 years.

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Enemies of Compound Interest: Fees and Taxes

Impact of Fees

100 million won, 7% annual return, 30 years

A 2% annual fee takes away 329 million won over 30 years!

Impact of Taxes

Financial income tax: 15.4% (interest/dividends)
Capital gains tax: Domestic stocks tax-free, overseas stocks 22%

Tax optimization strategies:
- ISA account (200M tax-free, 9.9% on excess)
- Pension savings (900M annual limit, tax deduction)
- Overseas stock loss offset

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Compound Interest Calculation Tools

Excel/Google Sheets

=FV(rate, nper, pmt, pv)

Example: 500,000 won monthly, 7% annual, 20 years
=FV(7%/12, 240, -500000, 0)
= approximately 258 million won

Online Calculator

At Compound Interest Calculator:

1. Enter initial investment
2. Enter monthly contribution
3. Enter annual interest rate
4. Enter time period
5. View growth chart

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Compound Interest Strategies

1. Start Early

Starting at 20 vs 30, retiring at 60

Starting at 20: 40 years of compounding
Starting at 30: 30 years of compounding

10-year difference = approximately 2x difference

2. Set Up Automatic Transfers

Payday → Auto transfer → Investment account

"Invest what's left" ❌
"Invest first, live on the rest" ✅

3. Minimize Fees

Passive funds (Index ETFs): 0.03-0.1%
Active funds: 1-2%

30-year difference: Hundreds of millions of won

4. Tax Optimization

Priority:
1. Pension savings (tax deduction + compound growth)
2. ISA (tax-free limit)
3. Regular account

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FAQ

Q1: Which is better, compound or simple interest products?

A: For long-term investments, always compound interest. For short-term (under 1 year), there's little difference. Most modern financial products use compound interest.

Q2: Is there a big difference between monthly and annual compounding?

A: At 12% annual rate, about 0.6% difference. At lower rates, the difference is minimal.

Q3: Is there negative compounding?

A: Yes, debt/loan interest is compound. Credit card revolving debt (15-20% annually) is a classic example of negative compounding. Avoid it.

Q4: Is the Rule of 72 accurate?

A: It's an approximation. It's fairly accurate for rates below 8%, but error increases above that.

Q5: What about considering inflation?

A: Calculate using real returns (nominal - inflation). 7% nominal return with 3% inflation equals 4% real return.

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Conclusion

Three keys to compound interest:

1. Time: The earlier you start, the better
2. Return Rate: 1% makes a difference of hundreds of millions over decades
3. Consistency: Keep investing, don't withdraw early

Start in your 20s, and you'll be comfortable in your 50s. Start in your 40s, and you'll be comfortable in your 70s.

Now is the earliest starting point.

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