What compound interest is
With compound interest you earn interest on your deposits and also on the interest you have already earned. Each year the amount that earns interest gets bigger, so growth speeds up over time.
A = P(1 + r/n)nt
- A = final amount
- P = starting amount
- r = yearly rate as a decimal
- n = times interest compounds per year
- t = years
This calculator also adds your monthly deposits and compounds them the same way, month by month.
Why time matters more than the rate
Example: $10,000 plus $500 a month at 7% for 20 years grows to about $300,850. You deposit $130,000 and the rest is interest. Leave it for 30 years and the balance reaches about $691,000, even though you deposit only $60,000 more.
Look at the bead chart. In the early years jade (your deposits) fills most of each row. In later years saffron (interest) takes over. That is the point where your money earns more than you put in.
The rule of 72
For a quick estimate, divide 72 by the yearly rate to get the number of years it takes money to double. At 6% money doubles in about 12 years. At 9% it takes about 8.