Compound Interest

Explanation

Albert Einstein reputedly called compound interest the "eighth wonder of the world". It is the principle where interest earns interest, creating exponential growth of your capital. ### The Power of Time The earlier you start, the more powerful the effect. - Saving $200/month from age 20 to 30 yields more at retirement than saving $200/month from age 30 to 65! ### Formula $A = P(1 + r/n)^{nt}$ - P: Initial Principal - r: Annual Interest Rate - t: Number of years ### Rule of 72 To find out how many years it takes to double your money, divide 72 by the interest rate. - At 6%, it doubles in 12 years (72/6). - At 10%, it doubles in 7.2 years.

Examples

• $10,000 invested at 5% for 20 years with no additions: Becomes $26,532.
• With an addition of $100/month: Becomes $67,000!

FAQ