In simple terms, compound interest is interest that is added to the principle of the loan. Once the interest has been added; this extra interest will then earn more interest on top of its initial interest. This type of interest is not just used for loans its also used for saving accounts, investments and various types of deposits. The rule of 72 can also be used in conjunction with compound interest so that people can plan out their retirement for the future.
Compound Interest and Savings Accounts
Consumers will benefit greatly from the use of compound interest when used in conjunction with a savings account. Some savings accounts can be set up with this financial benefit from banks that offer this type of service. Credit unions are other types of deposit based accounts where compound interest can be used.
Investments where Compound Interest can be used
Stocks, zero-coupon bonds, mutual funds and money market accounts are financial investments that use compound interest. Compound interests can be set up for dividends and returns with these these types of investment accounts.
Using Compound Interest for the Rule of 72 and Retirement
The rule of 72 is a financial equation that can be used to figure out the number of years that it will take for a person to double their money at given interest rate. The equation is outlined below.
72 ÷ by the amount of interest (for this example 10%) = 7.2 years.
In other words it will take 7.2 years for a person to double the amount of money that they invested into a particular account with compound interest.
The rule of 72 can be used to figure out a person’s retirement when they use compound interest. A person who uses compound interest on their retirement account, can accurately determine the amount of money they will have once they reach retirement age.