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Simple Interest vs Compound Interest
How Compounding Frequency Affects Growth
The Rule of 72: Quick Doubling Estimate
Interest Calculations for Savings and Loans
Frequently Asked Questions
Simple interest is calculated only on the original principal: I = P x r x t. Compound interest is calculated on the principal plus previously earned interest, causing exponential growth. Over long periods, compound interest significantly outpaces simple interest.
More frequent compounding earns slightly more. $10,000 at 5% for 5 years yields $12,763 with annual compounding, $12,820 with monthly, and $12,840 with daily. The difference is modest but increases with higher rates and longer periods.
The Rule of 72 is a quick way to estimate how long it takes to double your money: divide 72 by the annual interest rate. At 6%, your money doubles in approximately 72/6 = 12 years. At 8%, it doubles in about 9 years.
Savings accounts and CDs use compound interest (typically daily compounding). Most personal and auto loans also use compound interest (monthly). Credit cards use daily compounding on your average daily balance. Simple interest is rare but used in some auto loans and short-term notes.