Compound Interest, the Rule of 72, and Long-Term Growth
Summary
The document explains compound interest as returns earning additional returns, contrasting that growth pattern with simple interest. It introduces the Rule of 72 as a quick estimate of the time required for an investment to double, then gives a formula and examples involving an 8% annual rate and an initial deposit or loan. The examples show how compounding can increase savings over time and increase the cost of debt.
The article argues that starting earlier can materially affect long-term accumulated savings, illustrating this with a hypothetical account followed across several decades. It also notes that the same mechanism can work against borrowers who carry high-interest balances. The discussion is introductory: its examples assume a fixed rate and regular annual compounding, and it does not account for taxes, fees, inflation-adjusted returns, changing rates, or investment risk. The doubling shortcut is approximate, so actual outcomes depend on the compounding schedule and return achieved.
Key ideas
- Compound interest occurs when accumulated returns begin earning returns of their own.
- The Rule of 72 gives a rough estimate of doubling time by dividing 72 by the annual rate.
- A compound-growth formula can estimate interest under specified principal, rate, and compounding assumptions.
- Starting savings earlier gives compounding more time to affect the balance.
- Compounding can also accelerate debt growth when interest remains unpaid.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.