Importance of compounding from Jonathan Clements

I have never met Jonathan Clements, but he is definitetly one of my favorite business writers. When I was at Penn State and using a class packet, I bet over 50% of the packet was written by him. Here is tells of teh importance of compounding.

From Yahoo (and WSJ):

"People think in terms of simple interest, not compound interest. For instance, if our investments clock 8% a year for 10 years, we don't earn 80%, as many people assume.

Rather, we would notch a cumulative 116%. Remember, we earn returns not only on our original investment, but also on the investment gains earned in earlier years. Similarly, with credit-card debt, we pay interest both on our original purchases and on any monthly interest charges we didn't pay off in full.

'People use simple interest because they don't know to use anything else,' says Prof. Eisenstein, of Cornell University's Johnson Graduate School of Management. 'The higher the interest rate and the longer the time horizon, the worse the error.' He argues that this basic math mistake helps explain why people delay saving for retirement and why they postpone paying off credit-card debt."