Compound interest is the concept of adding accumulated interest back to the principal, so that interest is earned on interest from that moment on. The act of declaring interest to be principal is called compounding. For example, a loan may have its interest compounded every month: in this case, a loan with $1000 principal and 1% interest per month would have a balance of $1010 at the end of the first month.
Compound interest rates may be referred to as Annual Percentage Rate, Effective Interest Rate, Effective Annual Rate, etc. When a fee is charged up front to obtain a loan, APR usually counts that cost as well as the compound interest in converting to the equivalent rate.
Compound interest may be contrasted with simple interest, where interest is not added to the principal (there is no compounding). Compound interest predominates in finance and economics, and simple interest is used infrequently.
The Rule of 72 is a method of calculating the approximate number of periods over which a quantity will double. If you divide 72 by the expected growth rate, expressed as a percentage, the answer is approximately the number of periods to double the original quantity. For example, if you were to invest $100 at 9% per annum, then your investment would be worth $200 after 8.0432 years, using an exact calculation. The rule of 72 gives 72/9=8 years, which is close to the exact answer. The higher the interest, the quicker it is.
The 72 rule can also be used in reverse: to learn the interest rate needed to double your money in 8 years, divide 72 by 8, for an answer of 9% interest.
Finding Compound Interest
Using a Compound Interest Calculator, I calculated that if I save $1 per day ($365 per year) from age 18 to 65 (47 years), with an 8% interest; which is about how much the overall US stock market goes up each year, I would have 14,078.82 at my retirement age.
Compound interest rates may be referred to as Annual Percentage Rate, Effective Interest Rate, Effective Annual Rate, etc. When a fee is charged up front to obtain a loan, APR usually counts that cost as well as the compound interest in converting to the equivalent rate.
Compound interest may be contrasted with simple interest, where interest is not added to the principal (there is no compounding). Compound interest predominates in finance and economics, and simple interest is used infrequently.
The Rule of 72 is a method of calculating the approximate number of periods over which a quantity will double. If you divide 72 by the expected growth rate, expressed as a percentage, the answer is approximately the number of periods to double the original quantity. For example, if you were to invest $100 at 9% per annum, then your investment would be worth $200 after 8.0432 years, using an exact calculation. The rule of 72 gives 72/9=8 years, which is close to the exact answer. The higher the interest, the quicker it is.
It's basically a way or method to know how long it will take to double your money. Another example, if you deposit $3,000 into an account with a 2% interest rate, 72 ÷ 2 is 36. So in 36 years you will have $6,000.
The 72 rule can also be used in reverse: to learn the interest rate needed to double your money in 8 years, divide 72 by 8, for an answer of 9% interest.
Finding Compound Interest
Using a Compound Interest Calculator, I calculated that if I save $1 per day ($365 per year) from age 18 to 65 (47 years), with an 8% interest; which is about how much the overall US stock market goes up each year, I would have 14,078.82 at my retirement age.
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