Question 1

What is compound interest?

Accepted Answer

Compound interest is when your earned interest also earns interest. Unlike simple interest (which only earns on principal), compound interest grows exponentially because interest is added to principal and then earns more interest. This 'interest on interest' effect accelerates wealth growth over time.

Question 2

What's the difference between compound and simple interest?

Accepted Answer

Simple interest only earns on your initial investment. Compound interest earns on both principal and accumulated interest. Example: $10,000 at 5% for 2 years → Simple: $11,000, Compound: $11,025. Over decades, the difference becomes massive!

Question 3

Which compound frequency is better?

Accepted Answer

More frequent compounding is better. Monthly > Quarterly > Semi-annually > Annually. With the same APR, monthly compounding earns more than annual. For example, 5% APY compounded monthly gives ~5.12% effective rate, while annually gives exactly 5%.

Question 4

How do I maximize compound interest?

Accepted Answer

Start early (time is the most powerful factor), contribute regularly, choose higher interest rates, opt for more frequent compounding, and avoid withdrawals. Even small amounts invested young can grow massively over decades due to compound interest.

Question 5

What's the Rule of 72?

Accepted Answer

Divide 72 by your interest rate to estimate how many years it takes to double your money. At 6%, money doubles in ~12 years (72÷6=12). At 8%, in ~9 years. This quick mental math helps estimate compound growth without complex calculations.

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