Compound Interest: The 8th Wonder of the World
Albert Einstein once reputedly called compound interest the "eighth wonder of the world." Unlike simple interest, which is calculated only on the principal amount, compound interest is calculated on the principal plus the accumulated interest. This "interest on interest" effect causes wealth to grow exponentially over time, making it the most powerful tool for building long-term wealth.
How Compound Interest Works (The Formula)
Our calculator uses the standard compound interest formula to project your future wealth. Understanding this formula can help you make better financial decisions:
A = P(1 + r/n)^(nt)
- A: The future value of the investment/loan.
- P: The principal investment amount.
- r: The annual interest rate (decimal).
- n: The number of times interest is compounded per year.
- t: The number of years the money is invested.
The Rule of 72: A Quick Mental Trick
Want to know how long it will take to double your money? Use the Rule of 72. Simply divide 72 by your annual interest rate.
- At a 6% return: 72 ÷ 6 = 12 years to double.
- At an 8% return: 72 ÷ 8 = 9 years to double.
- At a 10% return: 72 ÷ 10 = 7.2 years to double.
Investment Growth Comparison
Here is how a $10,000 investment grows over 30 years at different rates of return:
| Interest Rate | After 10 Years | After 20 Years | After 30 Years |
|---|---|---|---|
| 4% (Conservative) | $14,802 | $21,911 | $32,434 |
| 7% (Market Avg) | $19,672 | $38,697 | $76,123 |
| 10% (Aggressive) | $25,937 | $67,275 | $174,494 |
Frequently Asked Questions (FAQ)
What is the difference between Simple and Compound Interest?
Simple interest is calculated only on the principal amount. Compound interest is calculated on the principal plus the interest that has already accumulated. Over long periods, compound interest results in significantly higher returns.
How often is interest compounded?
It depends on the investment. Savings accounts usually compound monthly. Bonds may compound semi-annually. The stock market effectively compounds continuously as companies reinvest profits.
Disclaimer: This calculator is for educational purposes only. Actual investment returns may vary due to market fluctuations, taxes, and fees. Please consult a financial advisor before investing.