Financial literacy education for the modern era.
CompoundInterest
The eighth wonder of the world. Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods.
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The Mathematics
Compound Interest Formula
- AFinal amount after interest
- PPrincipal (initial investment)
- rAnnual interest rate (as decimal)
- nCompounding frequency per year
- tTime in years
Why It Matters
Compound interest is often called the "eighth wonder of the world" because of its powerful ability to grow wealth exponentially over time.
Unlike simple interest, which is calculated only on the principal, compound interest is calculated on both the principal and the accumulated interest. This creates a snowball effect.
The key insight: time is your greatest asset. Starting early, even with smaller amounts, often beats investing more later.
Key Insights
Time is Your Greatest Asset
The longer your money compounds, the more dramatic the growth. Starting 10 years earlier can double your final amount.
Frequency Matters
More frequent compounding leads to faster growth. Daily compounding beats annual, though the difference diminishes over very long periods.
The Rule of 72
Divide 72 by your interest rate to estimate how many years it takes to double your money. At 7%, it takes about 10 years.
Real World Example
The Power of Starting Early
Consider two investors: Alex starts investing $200/month at age 25 and stops at 35 (10 years). Jordan starts at 35 and invests $200/month until 65 (30 years). Both earn 7% annually.
*Approximate values at age 65. Alex invested 3x less but ended up with more due to compound growth over more time.
Extra years of compounding can outweigh larger contributions