Question 1

What is compound interest?

Accepted Answer

Compound interest means you earn interest on both your original principal and on the interest you have already accumulated. Over time this creates exponential growth — often described as 'interest on interest.' The longer your time horizon, the more powerful compounding becomes.

Question 2

How does compounding frequency affect my returns?

Accepted Answer

More frequent compounding produces slightly higher returns because interest is added to the balance more often, giving it more opportunity to compound. Daily compounding yields slightly more than monthly, which yields more than quarterly, which yields more than annually — but the differences narrow as time goes on.

Question 3

What is the Rule of 72?

Accepted Answer

The Rule of 72 is a shortcut: divide 72 by your annual interest rate to estimate how many years it takes to double your money. At 6%, money doubles in roughly 72 ÷ 6 = 12 years. It is an approximation but surprisingly accurate for rates between 2% and 20%.

Question 4

How do monthly contributions affect compound growth?

Accepted Answer

Regular monthly contributions dramatically accelerate growth, especially over long periods. Each contribution starts compounding immediately, so contributions made early have the most impact. This is why starting to invest early — even small amounts — matters so much.

Question 5

What is the difference between APR and APY?

Accepted Answer

APR (annual percentage rate) is the nominal rate without compounding. APY (annual percentage yield) is the effective rate after compounding is applied. A 6% APR compounded monthly is a 6.168% APY. Banks advertise savings rates as APY and loan rates as APR, so comparisons can be misleading.

Question 6

How does inflation affect compound interest?

Accepted Answer

Inflation erodes the purchasing power of your returns. If your investment earns 7% nominally but inflation runs at 3%, your real return is roughly 4%. For long-term planning, it is important to use inflation-adjusted (real) return assumptions, typically 4-5% for a diversified stock portfolio.

Question 7

What return rate should I use for investments?

Accepted Answer

The US stock market (S&P 500) has historically returned about 10% nominally and 7% in real (inflation-adjusted) terms annually over long periods. Bonds typically return 3-5%. A 60/40 portfolio averages roughly 7-8% nominal. Always consider your actual risk tolerance and time horizon.

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