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Pro Strategy: Wealth Building Guide
How can you reach millions using compound interest? What is the Rule of 72? Read the full strategy.
Read Interest Guide →What is Compound Interest?
Compound interest is interest calculated on the initial principal and also on the accumulated interest from previous periods. This "interest on interest" effect causes investments to grow at an accelerating rate — a phenomenon Albert Einstein reportedly called "the eighth wonder of the world."
The Compound Interest Formula
A = P(1 + r/n)^(nt) + PMT × [((1 + r/n)^(nt) − 1) / (r/n)]
A = Final amount | P = Principal | r = Annual rate
n = Compounding periods/year | t = Years | PMT = Monthly contribution
A = Final amount | P = Principal | r = Annual rate
n = Compounding periods/year | t = Years | PMT = Monthly contribution
Compounding Frequency Comparison
More frequent compounding leads to slightly higher returns. For $10,000 at 7% over 10 years:
| Frequency | Future Value | Interest Earned |
|---|---|---|
| Annually | $19,671 | $9,671 |
| Quarterly | $19,890 | $9,890 |
| Monthly | $20,097 | $10,097 |
| Daily | $20,136 | $10,136 |
The Rule of 72
A quick mental shortcut: divide 72 by the annual interest rate to estimate how many years it takes to double your money. For example, at 6% interest, money doubles in 72÷6 = 12 years.