The Magic of Compounding Interest
Albert Einstein famously called compound interest the "eighth wonder of the world." While simple interest only calculates interest on the principal amount, compound interest calculates interest on the principal and the accumulated interest.
Simple vs Compound Formula
Simple Interest: I = P × r × t (Principal × Rate × Time).
Compound Interest: A = P(1 + r/n)^(nt). The variable n represents compounding frequency (e.g., 12 for monthly compounding). The more frequently interest compounds, the faster your wealth grows.
The Rule of 72
A quick mental model to estimate compounding is the Rule of 72. Divide 72 by your annual interest rate to see how many years it takes to double your money. At 8% interest, your money doubles in exactly 9 years (72 ÷ 8).