Watch your investments grow over time.
Watch your investments grow over time.
Compound interest means you earn interest not just on your initial principal, but also on all the interest you've already earned. Over time, this creates exponential growth โ often called "the eighth wonder of the world." The more frequently interest compounds (daily vs. annually), the faster your money grows.
The Rule of 72 is a quick mental shortcut: divide 72 by the annual interest rate to estimate how many years it takes to double your money. At 7%, your money doubles roughly every 10.3 years (72 รท 7 = 10.3).
Simple interest is calculated only on the principal. Compound interest is calculated on the principal plus all accumulated interest. On a $10,000 investment at 7% for 20 years: simple interest yields $24,000; compound interest (monthly) yields approximately $40,600 โ a 69% difference.
More frequent compounding produces slightly higher returns. For most practical purposes, the difference between monthly and daily compounding is small (usually less than 0.1% per year). The rate and time period matter far more than compounding frequency.
The S&P 500 has historically averaged approximately 10% annually before inflation, or about 7% after inflation. High-yield savings accounts currently offer 4โ5% APY. Government bonds typically offer 3โ5%. Always consider inflation when projecting real purchasing power.
Regular contributions amplify the compounding effect dramatically. $500/month for 20 years at 7% grows to about $260,000 โ your contributions total $120,000, but compound growth adds an additional $140,000 in interest. Starting even 5 years earlier could add $100,000+ to the final balance.