Understanding Interest
Simple vs Compound Interest
Simple Interest
Interest calculated only on the principal amount.
I = P × r × t
Compound Interest
Interest calculated on principal plus accumulated interest.
A = P(1 + r/n)^(nt)
The Power of Compounding
Compound interest is often called the "eighth wonder of the world." The more frequently interest compounds, the more you earn. Daily compounding earns more than monthly, which earns more than annually.
Rule of 72
To estimate how long it takes to double your money, divide 72 by the interest rate. At 6% interest, your money doubles in approximately 12 years (72 ÷ 6 = 12).