Compound Interest
When people talk about Compound Interest they are referring to the amount of money made solely through interest. Compound Interest is just the formal way of saying "making interest off your interest." Here is an example:
Example 1: Let's say I put $100 in the bank and my interest rate is 10%. After the first year, I will have made $10 interest on my $100, leaving me with a total of $110. Then, after another year I will have made $11.00 (10%) interest on my $110, which leaves me with a total of $121. Within 10 years, I would have made $159.37 interest on my $100. That's a lot of free money that I could use for college.
The Rule of 72
The Rule of 72 is an equation (72/x) used for compound interest. It allows a consumer to calculate the amount of time it takes to double their money, based on the annual interest. Likewise, it allows consumers to determine the required annual interest rate in order to double their money in a specified amount of time. Here are two examples:
Example 1: I have invested $100 in the bank. I would like to double my money within the next 5 years. In order to do that I have to use the following equation:
(72/x), where x is the number of years.
So, 72/5 is equal to 14.2.
Therefore, the annual interest rate must be at least 14.2%
for me to double my money in five years.
(72/x), where x is the number of years.
So, 72/5 is equal to 14.2.
Therefore, the annual interest rate must be at least 14.2%
for me to double my money in five years.
Example 2:I have invested $100 in the bank. My current annual interest rate is 7%. In order to determine the number of years it will take for my money to double I must use the following eqaution:
(72/x), where x is the annual interest rate.So, 72/7 is equal to about 10.29.
Therefore, it will take me 10.29 years in order to
double my money with an annual interest rate of 7%.
