Interest and compound growth

Interest

When you put money in a bank, the bank pays you a little extra for letting it use your money. That extra is interest. If you have $1,000 earning 8% a year, you get $80 the first year.

Compound growth: the snowball

Here's the magic part. In year two, you earn 8% on $1,080, not just $1,000. Your interest starts earning its own interest. That's compound growth. It's like a snowball rolling downhill, picking up more snow the bigger it gets.

At 8% a year, $1,000 grows to about $2,000 in 9 years without adding a single dollar.

The rule of 72

A quick trick to guess how long it takes money to double: 72 divided by the growth rate.

• At 8%: 72 ÷ 8 = about 9 years.
• At 6%: 72 ÷ 6 = about 12 years.
• At 12%: 72 ÷ 12 = about 6 years.

Starting early beats starting big

Three people each save $100 a month, it grows 8% a year, and they all stop at age 65:

• Starts at 15: puts in $60,000, ends with about $793,000.
• Starts at 25: puts in $48,000, ends with about $349,000.
• Starts at 35: puts in $36,000, ends with about $149,000.

The 15-year-old put in only $24,000 more than the 35-year-old, but ended with more than five times as much. The secret ingredient is time.

These are math examples with a steady 8% a year. Real investments go up and down, and nothing is guaranteed.

Remember

• Interest is what money earns for being used.
• Compound growth means interest earns interest.
• Rule of 72: 72 divided by the growth rate is about how many years to double.
• Start early. Time does the heavy lifting.