What is compound growth?
Compound growth is the process where the returns on an investment generate additional returns over time. Each period, growth is calculated on a larger base because prior gains are added to the original amount. It is one of the most powerful financial principles.
What is the compound growth formula?
The basic formula is: Final value = Initial value × (1 + growth rate)^periods. When periodic contributions are added, each contribution also begins to grow from the moment it is made.
What are some compound growth examples?
Investment: $10,000 at 7% annual growth rate over 20 years (no contributions) = $38,697. Growth: $28,697.
Regular savings: $1,000 initial + $200/month at 6% annual growth rate over 10 years = $34,685. Total contributions: $25,000. Growth: $9,685.
How do periodic contributions affect the result?
Regular periodic contributions can significantly increase the final amount. Even small regular additions create a large impact over time due to the power of compounding. Starting early is the most important factor — the longer money works, the greater the compound growth effect.
What is the difference between compound and simple growth?
Simple growth means the profit each period is the same (calculated only on the initial amount). Compound growth means the profit grows exponentially because prior returns also generate returns. Over long periods, the difference becomes very significant.
What is compound annual growth rate (CAGR)?
CAGR is the reverse of compound growth — it answers: "what constant annual return would have grown my investment from X to Y over N years?" The formula is: CAGR = (Final value / Initial value)^(1/years) − 1. Example: an investment that grew from $10,000 to $25,000 over 12 years has CAGR = (25,000/10,000)^(1/12) − 1 ≈ 7.9% per year. CAGR is widely used to compare investment performance across different time periods without being skewed by individual year volatility. For those buying a home while building investments, our mortgage calculator shows total interest cost so you can compare it against projected investment gains.
What is the Rule of 72?
The Rule of 72 is a quick way to estimate how long it takes for an investment to double: divide 72 by the annual growth rate. At 7% per year, money doubles in roughly 72 ÷ 7 ≈ 10.3 years. At 9%, it doubles in about 8 years. The rule works because ln(2) ≈ 0.693, and 72 is a convenient approximation that divides evenly by many common interest rates.