FINANCIAL LITERACY SERIES Compound Interest Explained Understand the math behind wealth building Learn how it works , why it matters , and its long - term effects Growth Time Savings % www keypointmetrics co IMPORTANT DISCLAIMER This presentation is for educational purposes only and does not constitute financial , legal , tax , or investment advice The examples , interest rates , and calculations shown are hypothetical and for illustrative purposes only ; they do not represent the performance of any specific investment or financial product Actual results will vary based on market conditions and individual circumstances Please consult a qualified financial advisor , accountant , or legal professional before making any financial decisions Hypothetical example for explanation DEFINITION What Is Compound Interest? Simply put , it is interest earning interest Instead of just earning money on your initial deposit , you earn money on the interest that has already been added to your account Principal (P) The starting amount of money you invest or borrow % Rate (r) The percentage of interest paid or charged annually Compounding (n) How often interest is calculated and added ( e g ., monthly , yearly ). Small changes in rate or frequency can create massive differences over time ↓ ↓ STEP 1 Principal $ 1,000 STEP 2 Earn Interest + $ 50 (5%) NEW BALANCE $ 1,050 Next interest is calculated on THIS COMPARISON Simple vs. Compound Interest The key difference lies in what the interest is calculated on Let ' s compare a $ 1,000 investment at 5% over 5 years Simple Interest Calculated only on the principal amount Interest Formula: P × r × t $1,000 × 0.05 × 5 = $250 Total Value: $1,250.00 Growth Comparison Over Time The green curve pulls away from the blue line over time The longer the timeframe , the wider this gap becomes Compound Interest Calculated on principal + accumulated interest Formula (Annual): P × (1 + r)^t $1,000 × (1.05)⁵ ≈ $276.28 Total Value: $1,276.28 THE MATH The Compound Interest Formula ADVANCED CONCEPTS Effective Annual Rate ( APY ) True return taking compounding into account APY = (1 + r/n) - 1 Continuous Compounding Theoretical limit of compounding frequency A = P × e = × ( 1 + ) ANNUAL COMPOUNDING FORMULA A P r n n × t A Final Amount The total value of the investment , including all interest P Principal The starting amount of money deposited or borrowed r % Annual Rate Interest rate in decimal form ( e g ., 5% = 0.05). n ↻ Frequency Times compounded per year (12 = monthly , 1 = yearly ). t Time The number of years the money is invested n rt VISUAL DEMONSTRATION How Compounding Accelerates Compounding creates a " snowball effect ." As time passes , your money grows faster because the interest you earn starts earning its own interest The Scenario Initial Investment $ 5,000 Interest Rate 6% Annual Time Period 20 Years THE DIFFERENCE By year 20, compound interest earns nearly $ 5,000 more than simple interest on the same initial deposit Account Balance Growth Compound ( Exponential ) Simple ( Linear ) YEAR 5 $ 6,691 vs $ 6,500 ( Simple ) YEAR 10 $ 8,954 vs $ 8,000 ( Simple ) YEAR 20 $ 16,035 vs $ 11,000 ( Simple ) CASE STUDY The High Cost of Waiting Time is the most significant factor in compounding Let ' s compare two investors who both save $ 200/ month with a 7% annual return Early Saver (Age 25) Invests for 40 years Smart Move Total Contributed : $ 96,000 Late Starter (Age 35) Invests for 30 years 10 Yrs Late Total Contributed : $ 72,000 The 10-Year Gap By waiting 10 years , the Late Starter contributes only $ 24 k less , but ends up with over $ 280,000 less in total value Over 50% of potential wealth lost * Hypothetical example Rate of return is constant for illustration ; real markets fluctuate Taxes / inflation not included Portfolio Value at Age 65 Assuming 7% annual return , compounded monthly DIFFERENCE - $ 280 k * Estimates based on 20% APR and fixed $ 60 monthly payment Actual minimum payment formulas vary by lender ⚠ WARNING The Dark Side: Debt & Credit Cards Compounding works both ways When you borrow at high rates ( like credit cards ), interest compounds against you , rapidly increasing what you owe Debt Reduction Strategies Paying Above Minimums Contributing extra principal reduces interest accumulation significantly The Avalanche Method A strategy prioritizing debts with the highest interest rates first Limiting New Debt Pausing new charges prevents balance growth while repaying The Minimum Payment Trap Scenario : $ 3,000 Balance @ 20% APR MONTHLY PAY $ 60 ( Minimum ) TIME TO PAY 9+ Years (109 months ) INTEREST PAID ~ $ 3,400 (> Original Loan ) Total Cost Breakdown Comparing the original purchase price vs the total amount paid if only making minimum payments Double the cost ! TIME VALUE Time Is Your Superpower The Rule of 72 A quick mental math shortcut to estimate how long it takes for an investment to double in value at a fixed annual rate of interest THE FORMULA 72 ÷ Rate ( % ) = Years to Double The higher the rate , the faster your money multiplies Even small rate increases shave years off the waiting time ⏱ How Fast Will It Double? Key Insight : Tripling the interest rate (3% → 9%) cuts the waiting time by two - thirds Start 5 Yrs 10 Yrs 15 Yrs 20 Yrs 25 Yrs 3% Return Conservative ( e g ., HYSA , Bonds ) 6% Return Moderate ( e g ., Balanced Portfolio ) 9% Return Aggressive ( e g ., Stock Market Index ) 24 Years 12 Years ⚡ 8 Years KEY FACTORS What Affects Compound Growth? It ' s not just the interest rate Six levers control how fast your wealth builds % PRIMARY DRIVER Interest Rate The speed limit of your growth Higher rates ( APY ) mean faster compounding → Compare APY vs APR MOST CRUCIAL Time Horizon Compounding needs time to snowball More years = more doubling periods → Concept : Starting Early ↻ ACCELERATOR Frequency How often interest is added Daily compounding beats monthly or annual → Check the ' n ' Value FUEL Regular Contributions Adding money regularly ( DCA ) dramatically increases the principal base → Automated Savings DRAG Taxes & Fees Costs reduce your net return High fees can eat up 30%+ of potential gains → Tax - Advantaged Accounts CONTEXT Inflation Reduces purchasing power Your real return is ( Nominal Rate - Inflation ). → Beating Inflation SUMMARY Key Takeaways Interest on Interest Compound interest accelerates wealth generation because your earnings start generating their own earnings The curve gets steeper over time Time is Critical Starting early is often more powerful than saving larger amounts later Early starts allow the principal to double multiple times Consistency Wins Regular contributions ( Dollar Cost Averaging ) coupled with compounding create a powerful engine for long - term growth ⚠ Avoid the Debt Trap Compounding works against you with debt High - interest credit cards can destroy wealth faster than investments can build it Optimize Your Returns Pay attention to APY vs APR , minimize fees , and consider tax - advantaged accounts ( like 401 ks or IRAs ) to keep more of what you earn Next Step Check the interest rates on your savings and your debts today A 1% difference can mean thousands of dollars over a lifetime IMPORTANT LEGAL DISCLAIMER This presentation is for educational and informational purposes only and does not constitute financial , investment , legal , or tax advice The examples , charts , and scenarios provided are hypothetical and used solely for illustrative purposes Past performance is not indicative of future results Financial rates , laws , and market conditions are subject to change Consulting with a qualified financial advisor , tax professional , or attorney is recommended before making any financial decisions tailored to your specific situation www.keypointmetrics.co