Understanding the Compound Interest
What is Compound Interest?
Compound interest is the addition of interest to the principal sum of a loan or deposit. In other words, it is "interest on interest". Unlike simple interest, which only pays interest on the original amount, compound interest allows your money to grow exponentially because every time interest is credited, the new larger balance is used to calculate the next interest payment.
The Magic of Compounding Frequency
The frequency at which interest is compounded makes a massive difference. The more frequently interest is added to your account (e.g., daily or monthly instead of yearly), the faster your money grows. A 10% annual rate compounded daily will yield significantly more money after 20 years than the same 10% rate compounded annually.
The Rule of 72
The Rule of 72 is a simple mathematical trick to estimate how long it takes for your money to double at a given compound interest rate. Simply divide 72 by your annual interest rate. For example, if you are earning 8% per year, your money will double in approximately 9 years (72 / 8 = 9).