Compound Interest
Compound interest is interest earned on the amount you originally deposit, and the interest your deposit gains over time. Compound interest allows your money to grow faster and can be applied daily, monthly, or quarterly depending on the financial institution. The more frequent your interest is calculated, the more money you will be able to earn.
Show me the money!
Depending on the rate of return, putting just $100 a month into an interest-bearing account and then letting it compound can generate a surprisingly large nest egg.
Growth of $100 deposited monthLy
| Interest Rate | 5 Years | 10 Years | 15 Years | 20 Years | 25 Years | 30 Years | 35 Years | 40 Years |
|---|---|---|---|---|---|---|---|---|
| 2.0% | $6,315 | $13,294 | $21,006 | $29,529 | $38,947 | $49,355 | $60,856 | $73,566 |
| 3.0% | $6,481 | $14,009 | $22.754 | $32,912 | $44,712 | $58,419 | $74,342 | $92,837 |
| 4.0% | $6,652 | $14,774 | $24,691 | $36,800 | $51,584 | $69,636 | $91,678 | $118,590 |
| 5.0% | $6,829 | $15,593 | $26,840 | $41,275 | $59,799 | $83,573 | $114,083 | $153,238 |
| 6.0% | $7,012 | $16,470 | $29,227 | $49,435 | $69,646 | $100,954 | $143,183 | $200,145 |
| 7.0% | $7,021 | $17,409 | $31,881 | $52,397 | $81,480 | $122,709 | $181,156 | $264,012 |
| 8.0% | $7,397 | $18,417 | $34,835 | $59,295 | $95,737 | $150,030 | $230,918 | $351,428 |
| 9.0% | $7,599 | $19,497 | $38,124 | $67,290 | $112,953 | $184,447 | $296,385 | $471,643 |
| 10.0% | $7,808 | $20,655 | $41,792 | $76,570 | $133,789 | $227,933 | $382,828 | $637,678 |
| 11.0% | $8,025 | $21,899 | $45,886 | $87,357 | $159,058 | $283,023 | $497,347 | $867,896 |
| 12.0% | $8,249 | $23,234 | $50,458 | $99,915 | $189,764 | $352,991 | $649,527 | $1,188,242 |
Rule of 72
The Rule of 72 is the time it will take an investment (or debt) to double (reduce) in value at a given interest rate using compounding interest. Here's the formula:
72 / Interest Rate = Years to double investment (or reduce debt)
Rule of 72 Example
Doug invests $2,500 into a CD earning a 6.5% interest rate. How long will it take
Doug's investment to double?
72 / 6.5% = 11 years