Definition
Compound interest is the foundation of long-term wealth building. Unlike simple interest (calculated only on principal), compound interest earns interest on interest, creating exponential growth over time. Einstein allegedly called it the "eighth wonder of the world." The Rule of 72 estimates doubling time: divide 72 by the interest rate. Starting early is the most powerful factor due to compounding.
functions Formula
FV = PV × (1 + r/n)^(n×t)
lightbulb Example
$10,000 invested at 8% compounded annually for 30 years grows to $100,627. The same investment for 40 years grows to $217,245—the extra 10 years more than doubles the result through compounding.
Pro Tip
Starting 10 years earlier has more impact than doubling your savings rate. Time is the most valuable input in the compounding equation.
verified_user Key Points
- Interest earns interest—exponential growth
- Rule of 72: 72/rate = years to double
- Starting early is the most powerful advantage
- Einstein: "eighth wonder of the world"