What is compound interest?
Compound interest is interest calculated on both the initial capital and the accumulated interest from previous periods. In simple terms: you earn interest on your interest.
The formula
The formula for compound interest is: A = P(1 + r/n)^(nt)
- A = Final amount
- P = Capital (initial investment)
- r = Annual interest rate (decimal)
- n = Times interest is capitalized per year
- t = Time in years
Real world example
Invest $10,000 at a 7% annual return, compounded monthly, for 30 years:
Result: $81,164 — more than 8 times your original investment without adding another dollar.
The rule of 72
A quick way to estimate how long it takes to Double your money: divide 72 by your annual rate of return. With an 8% yield, your money doubles about every 9 years.
How to maximize compound interest
- Start early: Even just a few years makes a big difference
- Reinvest dividends automatically
- Choose tax-advantaged accounts to avoid missing out on tax gains
- Minimize fees: Even 1% in annual fees can cost you tens of thousands over time
Be the first to comment!