Bunga majemuk adalah bunga yang dihitung berdasarkan pokok dan bunga yang terakumulasi. Ini adalah selisih antara mendapatkan bunga atas $1.000 dan mendapatkan bunga atas $1.000 ditambah bunga yang telah Anda peroleh. Seiring waktu, selisih itu menjadi sangat besar. Albert Einstein konon menyebut bunga majemuk sebagai keajaiban dunia kedelapan. Terlepas dari apakah ia mengatakannya atau tidak, perhitungan matematisnya sangat mengesankan.

The formula is A equals P times the quantity 1 plus r over n raised to the power nt, where A is the final amount, P is the principal, r is the annual interest rate, n is the number of times interest compounds per year, and t is the number of years. A $10,000 investment at 5 percent compounded annually grows to $16,289 in 10 years. At 7 percent, it grows to $19,672. At 10 percent, it grows to $25,937. The higher the rate, the more dramatic the compounding.

Compounding works against you when you borrow. A credit card charging 20 percent interest compounds daily. A $5,000 balance can double in four years if you make only minimum payments. Student loans, mortgages, and car loans also compound. The faster the compounding frequency, the more you pay.

The rule of 72 is a quick way to estimate doubling time. Divide 72 by the interest rate. At 6 percent, money doubles in about 12 years. At 9 percent, in about 8 years. At 12 percent, in about 6 years. It is not exact, but it is close enough for a quick calculation.