What is the difference between simple and compound interest?

Simple interest is calculated only on the original principal amount, while compound interest is calculated on both the principal and the accumulated interest from previous periods. Compound interest leads to faster growth over time because you earn "interest on interest."

How can I calculate compound interest?

The basic formula for compound interest is A = P(1 + r/n)^(nt), where A is the future value of the investment/loan, P is the principal investment amount, r is the annual interest rate (as a decimal), n is the number of times that interest is compounded per year, and t is the number of years the money is invested or borrowed for. Online calculators can simplify this for you.

Why is starting early so important for compound interest?

Starting early provides your investments with more time to compound, which is the most critical factor for exponential growth. Even small, consistent contributions made over many decades can accumulate into a substantial sum, far outperforming larger contributions made later in life due to the power of time.

Does compound interest apply to debt?

Yes, compound interest applies to debt, often working against the borrower. High-interest debts like credit cards accrue interest on the principal and any unpaid interest from previous periods, causing the debt balance to grow rapidly if not paid down aggressively.

What is the Rule of 72 and how is it used?

The Rule of 72 is a quick mental shortcut to estimate how long it will take for an investment to double in value. You divide 72 by the annual interest rate. For example, at an 8% annual return, an investment will roughly double in 9 years (72 / 8 = 9).

What are the best ways to maximize compound interest on my savings?

To maximize compound interest, start investing early, contribute consistently and increase contributions over time, choose investments with reasonable growth potential (like low-cost index funds), and minimize fees and taxes by utilizing tax-advantaged accounts like 401(k)s and IRAs.

How do fees impact compound interest?

Fees, even small ones, can significantly erode your returns over long periods, reducing the amount of money available to compound. For instance, a 1% annual fee can reduce your total returns by 20-30% over 30 years compared to a no-fee investment. Always opt for low-cost investment options.

Compound Interest Guide: Build Wealth & Manage Debt | One…