Copy Paste Experiment: The Magic of Compound Interest

What is compound interest? It is the money you earn by re-investing all the interest you earn. Compound interest is how the rich get richer.

Here's an example of compound interest. You may have heard of this old chestnut: If someone were to offer you the choice between $1 million cash now, or a penny on day 1, with that figure doubled and compounded each day for 31 days, which should you take?

The correct answer is, you should take the latter because it will amount to $10,737,418.24. Sounds impossible, but the math works out:

Day 1: $0.01
Day 2: $0.01 x 2 = $0.02
Day 3: $0.02 x 2 = $0.04
Day 4: $0.04 x 2 = $0.08
Day 11: $10.24
Day 22: $20,971.52
Day 31: $10,737,418.24

Now it should be easy to understand why Albert Einstein supposedly said, "Compound interest is the greatest force in the universe." Compounding interest is, after all, how the rich get richer.

The articles below explain how to calculate compound interest, as well as a useful shortcut called the Rule of 72.

What is the difference between compounding interest and simple interest?

Learn about simple interest and compound interest, how to calculate the two types of interest and the main difference between them. Read More

How do I calculate compound interest using Excel?

Learn what compound interest is, the formula used to calculate compound interest, and how to calculate it using three different techniques in Microsoft Excel. Read More

What is the 'Rule of 72'?

When dealing with low rates of return, the Rule of 72 is fairly accurate. Read More

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