Compound interest: the most powerful force in the universe?

Compound interest is a very impressive force and it is an interesting part of mathematics. Albert Einstein himself said that compound interest is the most powerful force in the world and it is pretty hard to disagree.


What is compound interest?

For those that are not aware of the concept of compound interest we will give you a very simple example. If you have £100 in a bank today and your account pays 10% interest a year how much money do you have in a year?

Well firstly you have the money you originally put in (£100) but you also receive £10 interest from the bank. So at the end of the year you have £110.

The magic comes though the year after. Now you keep your money in the bank and after another year how much do you have?

You again have the money that you started with (£110) but this time the interest you have is £11. This £11 can be split into the £10 interest on the original amount of money you had plus £1 interest on your interest. 


Rule of 70: interest on interest?

Though this interest on interest starts small it quickly grows. Using the rule of 70 you can calculate that it takes 7 years to roughly double your original £100 to £200.

The rule of 70 is one way you can calculate very quickly how long it will take to double your £100 and this is how it works.

70 divided by your interest rate = number of years to double your money

70/10 = 7 years

From this you can calculate how different interest rates effect the number of years in which you can double your money. If interest rates are 5% or 20% how many years does it take to double your money?

70/5 = 14 years
70/20 = 3.5 years

Hopefully this blog will get you interested in reading more about compound interest and the rule of 70. Read more online at wiki and try to appreciate why Einstein really did think it was the most powerful force in the world.