Lesson 3: Compound Interest

Compound Interest Reference

Simple vs Compound Interest

• Simple interest: I = P × r × t. Interest is earned only on principal.
• Compound interest: A = P(1 + r/n)^(nt). Interest is earned on principal AND accumulated interest.

The Formula

A = P(1 + r/n)^(nt)

• A = final amount
• P = principal (starting amount)
• r = annual interest rate (decimal)
• n = compounding frequency per year
• t = time in years

Rule of 72

Estimate years to double: Years ≈ 72 / interest rate

• At 6%: doubles in ~12 years
• At 10%: doubles in ~7.2 years
• At 24% (credit card!): doubles in ~3 years

Time Is the Key Variable

Starting at 22 vs 32 with the same contributions can result in nearly double the final balance at retirement. The early years do the most compounding work.

Compounding Works Against You Too

Credit card debt at 20% APR compounds against you. A $5,000 balance with only minimum payments can take 20+ years and $10,000+ in interest to pay off.