How Compound Interest Works
Compound interest is often called the most powerful force in finance. Unlike simple interest, which is calculated only on the original principal, compound interest is calculated on the principal plus all previously accumulated interest.
The formula for compound interest is: A = P(1 + r/n)^(nt), where P is the principal, r is the annual rate, n is compounding frequency, and t is time in years.
The Rule of 72
Want a quick estimate of how long it takes to double your money? Divide 72 by your annual return rate. At 10% annual returns, your money doubles every 7.2 years. At 7%, it doubles every 10.3 years.
Why Starting Early Matters
Consider two investors: one starts at 25 and invests $300/month for 10 years then stops. The other starts at 35 and invests $300/month for 30 years. At 10% returns, the early investor ends up with MORE money at age 65, despite investing for only 10 years vs 30 years. That's the power of compounding.