The Eighth Wonder of the World
Albert Einstein reputedly called compound interest the "eighth wonder of the world," adding that "he who understands it, earns it... he who doesn't... pays it."
Unlike simple interest, which is calculated only on the principal amount, compound interest is calculated on the principal plus the interest that has already accumulated. This creates a "snowball effect" where your money grows faster and faster over time.
The Rule of 72
Want a quick mental math trick? The "Rule of 72" estimates how long it will take for an investment to double in value. Simply divide 72 by your interest rate.
- At 6% interest: 72 / 6 = 12 years to double.
- At 8% interest: 72 / 8 = 9 years to double.
- At 10% interest: 72 / 10 = 7.2 years to double.
Frequently Asked Questions
What is the difference between Simple and Compound interest? ▼
Simple interest is linear—you earn the same amount every year (e.g., $50). Compound interest is exponential—you might earn $50 the first year, $52 the next, then $55, and eventually $100+ per year, even without adding more money.
Does frequency matter (Monthly vs. Annually)? ▼
Yes! The more frequently interest is compounded (Daily > Monthly > Annually), the more money you make. However, for most long-term estimates, annual compounding is a close enough approximation.