The Magic of Compound Interest Explained
Albert Einstein is often credited with saying: "Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it." But how does it really work?
📈 Simple vs Compound Interest
With simple interest, you only earn money on your initial investment. With compound interest, you earn interest on your interest! It's the snowball effect that allows your savings to explode over the long term (10, 20 or 30 years).
La Formule Magique
A = P(1 + r/n)^(nt)
Frequently Asked Questions About Investing
The more often interest is paid (e.g., monthly instead of annually), the sooner it starts generating new interest. It's mathematical: monthly compounding yields more than annual.
Adding even a small amount each month (e.g., $50 or $100) has a disproportionate impact on the final result thanks to time. Use the simulator to see the difference between 'no contributions' and 'with contributions'.
The Rule of 72 helps estimate how long it takes to double your investment. Divide 72 by your annual return rate. For example, with 8% return: 72 ÷ 8 = 9 years to double your initial capital.
Historically, stock markets offer an average return of 7-10% per year over the long term. Bonds yield 2-5%, and safe savings accounts around 1-3%. The higher the return, the higher the risk.