Compound Interest
Interest calculated on both the initial principal and the accumulated interest from previous periods.
Compound interest is interest on interest. If you invest $1,000 at 7% annually, you earn $70 in year one (simple interest). In year two, you earn 7% on $1,070 — which is $74.90. By year 30, your annual interest is $574 on a balance of $7,612 — all from that original $1,000. The Rule of 72 estimates doubling time: divide 72 by the interest rate. At 7%, money doubles in roughly 10.3 years.
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