Compound interest is the secret that makes your money work harder for you. Unlike simple interest, which accrues solely based on your initial deposit or principal amount, compound interest allows your investments to grow exponentially by earning interest on both the principal and any accumulated interest.
Compound Interest vs. Simple Interest
Let's break it down further. With simple interest, your earnings remain constant because interest is calculated solely on the principal amount. However, compound interest, your returns snowball over time as interest is continuously added to the principal, creating a compounding effect that accelerates your wealth accumulation.What Makes Compound Interest Powerful
Compounding is special in the way that it works over a period of time. If you were to not contribute any additional funds to your initial investment, compound interest would ensure that your money continues to grow. No matter the size of your savings, your funds will benefit from compounding. The longer you keep funds invested, the more time your money can work for you by earning additional interest.Let's take a look at the graph below. In this example, all participants are investing $5,000 annually at a 7% interest rate.

Understanding the "Rule of 72"
Now, how can you estimate when your investment will double? Enter the Rule of 72, a formula to determine the approximate time it takes for your investment to double in value. The formula for the rule is: Number of years to double an investment = 72/Interest Rate
For instance, let's say you have an investment with an annual interest rate of 7%. Using the Rule of 72, you would calculate 72 divided by 7, which equals approximately 10.28 years. So, in just over a decade, your initial investment would double in value.
It's crucial to recognize that while the Rule of 72 provides a useful estimate, it doesn't account for additional contributions over time. Continuing to invest regularly can significantly accelerate your wealth accumulation and enhance your financial security.