Simple interest calculates interest based solely on the original principal amount. Compound interest, however, continuously calculates interest on the principal AND the accumulated interest from previous periods. Over long horizons, compounding creates spectacular exponential growth, famously called "the eighth wonder of the world" by Albert Einstein.
The Rule of 72 is an elegant mental math formula: simply divide 72 by your annual return rate to estimate exactly how many years it will take to double your investment.
| Rate | Years to Double | Rate | Years to Double |
|---|---|---|---|
| 1% | 72 years | 6% | 12 years |
| 2% | 36 years | 8% | 9 years |
| 3% | 24 years | 10% | 7.2 years |
| 4% | 18 years | 12% | 6 years |
Absolutely. The more frequently your interest compounds, the higher your effective annual yield (APY) will be, since your "interest on interest" hits your account much sooner. This explicitly highlights why avoiding high-interest credit card debt (which often compounds daily) is so critical, yet capturing monthly stock dividends is highly beneficial.