Wonders of Compounding Interest

Compound interest is sometimes called one of the wonders of the financial world. Very simply, compound interest just means you earn interest on your interest. Compound interest is the interest on savings calculated on both the initial principal and the accumulated interest from previous periods. The terms “compounded daily”, “compounded quarterly” or “compounded annually” simply refer to when the interest is added to the balance and begins earning more interest.

The RULE OF 72 is an easy way to estimate relatively accurately the impact of different interest rates over different periods of time. The thing to remember is “money doubles when the interest rate times the number of years equals 72.”

• Money doubles in 6 years at 12%.
• Money doubles in 10.3 years at 7%.
• Money doubles in 12 years at 6%.
• Money doubles in 8 years at 9%.
• Money doubles in 9 years at 8%.

While the Rule of 72 won’t give you precise results, it is an easy way to get a good estimate in a hurry.