Question 1

What is compound interest?

Accepted Answer

Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. Unlike simple interest, which only earns on the original amount, compound interest lets your earnings generate their own earnings — creating a snowball effect over time.

Question 2

How often should interest compound?

Accepted Answer

The more frequently interest compounds, the more you earn. Daily compounding produces slightly more than monthly, which produces more than annually. In practice, most savings accounts compound daily, while many investments compound monthly or quarterly. The difference between daily and monthly compounding is usually small, but it adds up over decades.

Question 3

What's a good rate of return to use?

Accepted Answer

It depends on your investment type. High-yield savings accounts currently offer around 4–5%. The S&P 500 has historically averaged about 10% per year before inflation (roughly 7% after inflation). Bond funds typically return 3–6%. For a realistic long-term estimate, 7–10% for stocks or 4–5% for conservative investments are common starting points.

Question 4

Does contribution timing matter?

Accepted Answer

Yes, but the difference is modest. Contributing at the beginning of each period (annuity due) earns slightly more than contributing at the end (ordinary annuity), because each contribution has one extra compounding period to grow. Over long time horizons, this can add up to a noticeable difference.

Question 5

What is the Rule of 72?

Accepted Answer

The Rule of 72 is a quick way to estimate how long it takes for your money to double. Divide 72 by your annual interest rate — for example, at 8% interest, your money doubles in approximately 9 years (72 / 8 = 9). It's a handy mental shortcut for evaluating investments.

Question 6

Should I account for inflation?

Accepted Answer

This calculator shows nominal returns (before inflation). To estimate real purchasing power, subtract the expected inflation rate (typically 2–3%) from your interest rate. For example, if you expect 10% returns with 3% inflation, use 7% for a more realistic picture of your future buying power.

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