🎯 Goal: Understand the power of compounding and why to start early.
You understand compound interest: interest is added to principal, then that earns more interest, like a snowball. Most important is time — starting early beats starting late.
Let’s explore
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Compound interest is when interest is added to the principal, and that grows interest too. Like a snowball rolling downhill, bigger and bigger.
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Time matters more than amount. Starting at 15 beats starting at 30 — even with less money.
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Formula: Future value = Principal × (1 + rate)^years.
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Formula: Future = Principal × (1 + rate)^years. The "^" means power — multiply (1 + rate) by itself "years" times. Example 10M, 8%/year, 2 years: 10M × 1.08 × 1.08 = 11.66M. Year 2 earns interest on year 1’s interest too — that is what differs from simple interest.
Practice activity
🔬 What does 10 million become in 40 years at 8%/year? Use the compound game to check.
Worked example: You compute 10,000,000d at 8%/year for 40 years: 10,000,000 × (1.08)^40 ≈ 217,000,000d. Just 10 million becomes over 217 million — the power of compounding and time.
Quick quiz
1. Compound differs from simple interest because?
→ Interest also earns interest
2. The strongest factor in compounding?
→ Starting very early (time)
3. The formula for value after n years?
→ Principal × (1 + rate)^years
4. "^years" in the formula means?
→ Multiply (1+rate) by itself "years" times
5. 10M, 8%/year, after 2 years ≈?
→ 11.66M
6. In year 2, interest is calculated on?
→ Both principal and year-1 interest
🎯 Real-life mission
Use the Rule of 72 to estimate how long money takes to double.