Compound Interest

What is Compound Interest?

Interest earned on both the original principal and on interest already earned.

Understanding Compound Interest

Compound interest adds earned interest back to the principal, so each later period earns interest on a larger balance.

The more often interest compounds and the longer money stays invested, the larger the effect.

A = P\left(1 + \frac{r}{n}\right)^{nt}

Here, $P$ is the principal, $r$ the annual rate, $n$ the compounding periods per year, and $t$ the number of years.

$1,000 at 5% compounded yearly for 10 years grows to about $1,628.89.

What is the rule of 72?

Divide 72 by the annual rate to estimate the years needed to double money. At 6%, that is about 12 years.