When banks deal in money, they always factor in interest. They give you interest for holding your money and they charge interest when you borrow their money. Compound interest is the when they add interest to an already growing amount of money. For example, lets say you deposit $100 and your account gives you 10% interest every year, or annually. After the first year, you can expect to see $110 dollars now that interest has been added to your balance, or principal. Next year, you would have $121 dollars. Instead of adding interest (10%) to your initial amount of money ($100), the bank calculates interest on your new balance ($110). This way, you earn interest on an already building interest. And that, is how compound interest works.
Compound interest can be be calculated annually or even quarterly and even hourly. When you deal in money, always remember to note interest rate and the frequency of the compounding.
The Rule of 72
This rule is used to estimate the time it takes for an investment to double in value of halving time.
the rule of 72, the rule of 71, the rule of 70 and the rule of 69 are used based on the rate and compounding period of the money invested.
The chart below (courtesy of genxfinance.com) is an illustration of the rule of 72.
Also using the Compound Interest Calculator - find out how much money you would have if you saved $1 per day ($365 per year) from age 18 to 65 (retirement age). Use 8% interest in your calculation; which is about how much the overall US stock market goes up each year.
Current Principal - $365
Annual Addition - $365
Years to grow - 47 Years
Interest Rate - 8%
Compound Interest ONE time annually
Future Value (from age 18 to 65) - $192,122.92
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