Partha's Econ Blog

Compound interest is a form of interest that adds the accumulated interest back to the principal which allows the interest to grow on the interest from then on. To understand any investment well, one needs to understand the time value of money. Invested money increases in value over time due to the growth from use of production factors like machines, land, labor. In compound interest concept, the interest earned is added to the principal for next time's computation of interest. The time interval between the occasions at which interest is added to the account is known as the compounding period. In contrast, simple interest is increased by the interest earned from the actual principal, the earned interest is not accumulated in the principal for calculation of interest for the next time.

be (72/8=9 years). This formula gives an approximation of the time needed to retain an investment before it doubles in its value. A more accurate calculationThe rule of 72 is a common way used by investors to compute how long it takes for a variable X to double if it's increasing at a given interest rate (r). For example, suppose I have $100 in my bank account that pays 8% interest yearly. Then with the rule of 72, the doubling period would would be X=ln 2/(ln(1+r)).

Using the compound interest calculator, I calculated that if I save $1 daily in an account with the principal of $365 and let it grow for 47 years (age 18 to 65) at an annual compound interest rate of 8%, then I would have $14,078.82 at my retirement age.