Compound interest is the interest calculated on the initial principal and the accumulated interest from previous periods. It's often called "interest on interest" and can significantly accelerate the growth of your investments over time. Albert Einstein reportedly called compound interest "the eighth wonder of the world."
Where:
Simple interest is calculated only on the principal amount, while compound interest is calculated on both the principal and accumulated interest from previous periods. Compound interest grows exponentially over time.
More frequent compounding leads to higher returns. Daily compounding typically provides the best results, followed by monthly, quarterly, semi-annually, and annually.
The Rule of 72 is a quick way to estimate how long it will take for an investment to double at a given annual rate of return. You simply divide 72 by the annual rate of return to get the approximate number of years it will take for the investment to double.
Yes, when given enough time, compound interest can significantly grow your wealth. The key factors are starting early, contributing regularly, and allowing time for the compounding effect to work. Even small, regular investments can grow substantially over decades thanks to compounding.