TopDailyTools
$
%
years
$
Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest.
The formula for compound interest is:
Compound interest can significantly increase your wealth over time. Here's how it helps:
Exponential Growth: Your money grows faster over time as you earn interest on both your principal and accumulated interest.
Time is Your Friend: The longer you invest, the more powerful compounding becomes.
Regular Contributions: Adding regular contributions to your investment accelerates growth even further.
Higher Frequencies: More frequent compounding (monthly vs. annually) results in more growth.
The earlier you start investing, the more time your money has to grow through compounding.
Regular contributions, even small ones, can significantly increase your returns over time.
Reinvesting dividends and interest payments accelerates the compounding effect.
Seek investments with competitive interest rates while managing risk appropriately.
A savings account with a 2% annual interest rate compounded monthly.
A 5-year CD with a 3% annual interest rate compounded quarterly.
401(k) or IRA investments growing at an average of 7% annually compounded daily.
A diversified investment portfolio with an average annual return of 8% compounded annually.
The Rule of 72 is a simple way to determine how long an investment will take to double given a fixed annual rate of interest.
For example:
| Interest Rate | Years to Double |
|---|---|
| 2% | 36 years |
| 4% | 18 years |
| 6% | 12 years |
| 8% | 9 years |
| 10% | 7.2 years |