Question 1

What is compound interest?

Accepted Answer

Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. Unlike simple interest, which only earns interest on the original amount, compound interest allows your money to grow exponentially over time.

Question 2

How often should interest compound?

Accepted Answer

More frequent compounding results in slightly higher returns. Daily compounding earns more than monthly, which earns more than annually. However, the difference between daily and monthly compounding is usually small. Most savings accounts compound daily, while many investments compound monthly or quarterly.

Question 3

What's the difference between simple and compound interest?

Accepted Answer

Simple interest is calculated only on the original principal amount. Compound interest is calculated on the principal plus any previously earned interest. Over long periods, compound interest produces significantly more growth than simple interest.

Question 4

What is the Rule of 72?

Accepted Answer

The Rule of 72 is a quick way to estimate how long it takes to double your money. Divide 72 by the annual interest rate to get the approximate number of years. For example, at 6% interest, your money doubles in roughly 12 years (72 / 6 = 12).

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