Reflection on the Miracle of Compounding

This week in Personal Finance and Economics, we learned about compound interest and how it can make money for you. Compound interest is when interest is added to the principal amount and the interest added also earns interest. We learned that compound interest may work slowly, but it can accumulate to a large sum. The amount that that compounding can earn people is based on how much money you invest, how long you set aside your money, and how much of your invested money grows each year. In order for compounding to work, we need to save money and take advantage of compound interest in stocks, bonds, and other high growth methods.
The Rule of 72 offers us a convenient method by which we can see how long it will take our money to double. This makes life much easier if we are just trying to get a rough estimate because we don't need to use nasty and long calculations with the equation: A = P(1 + r/n)nt. All that a person needs to do is take the number 72 and divide it by the average annual growth which can also be referred to as the return rate. Through this simple trick, people will arrive that the number in years that it will take for their money to double.

So, people can take advantage of compound interest and make their money work for them. The concept of compound interest is a very useful one that I am glad we are learning in class. As we delve further into our Personal Finance unit, we are going to be learning about skills that will directly help us later in life. By knowing about compound interest, we know the best ways to gain money and which savings vehicle might offer a better deal. The concepts on compound interest and the Rule of 72 offer us a good background of knowledge so we can start working on making money the easy way even earlier.

Works Cited

"MNP #152 - MLM and COMPOUND INTEREST !" Marketing Network Pro. Web. 08 May 2014.