Understand compound interest.
A 12-minute lesson: what compound interest is, the year-by-year snowball, its 4 pieces, cases, myths, the rule of 72, and a real-debt challenge.
What compound interest is and how to calculate how much it grows or how much you owe over time.
The case
Your debt grows on its own overnight. It's not magic: it's math.
In 12 minutes you'll know what compound interest is, watch 100 € grow year by year, and calculate how much someone owes or earns in 2 years.
What you will learn
- Explain compound interest in your own words
- Calculate chained 2-year growth
- Use the rule of 72 to estimate doublings
The snowball
Compound interest reinvests what you earn: each year you calculate on a larger amount. That's why time matters more than the rate.
Capital
The starting amount everything revolves around.
Rate
The percentage applied each period.
Time
The periods chained one after another.
Compounding
Reinvesting gains so they generate too.
Frequently asked questions
What is compound interest?
Calculating interest on what has already accumulated, not just the starting amount: gains generate again.
Do I need advanced math?
No: just multiply by (1 + rate) once per year.
Test yourself: Lightning test: does it grow or fool you?
What is compound interest?
Correct answer: Interest that earns more interest when reinvested.
Compound = gains are added and generate again. Simple would always be on the starting amount.
You put in 100 € at 10% yearly. How much do you have after 2 years?
Correct answer: 121 €: 110 after the first year and 121 after the second.
Year 1: 100 + 10% = 110. Year 2: 110 + 10% = 121. The second year calculates on 110, not on 100.
How many years does it take to double at 6% yearly?
Correct answer: About 12 years: 72 divided by 6.
The rule of 72: divide 72 by the rate and you get the years to double. 72 / 6 = 12.
The pocket rule — Compound interest calculates each period on the accumulated amount, not the starting one. Save early and avoid high-rate debt.
What you take away
Explain compound interest and calculate 2-year growth.