Compound interest and the rule of 72

Compound interest is interest earned on both your original money (the principal) and on the interest you have already earned, so your savings grow faster over time. If $1,000 earns 5 percent a year compounded yearly, it grows to $1,050 after one year and $1,102.50 after two, because the second year's interest is also earned on the first year's $50. After 10 years it reaches about $1,628.89, compared with $1,500 from simple interest, which pays only on the original $1,000. The rule of 72 gives a quick estimate of how long money takes to double: divide 72 by the annual interest rate, so at 6 percent, money doubles in about 12 years. Time is the key ingredient, which is why starting to save early matters so much. Compounding works against you on debt, too: unpaid credit card balances can grow quickly as interest is charged on top of earlier interest.

This explanation is AI-generated and can occasionally be wrong. 🚩 Report