It calculates the future value of an investment based on principal, annual interest rate, compounding frequency, and time period.
Compound interest means you earn interest on both your original principal and the interest already accumulated. Over time this grows significantly faster than simple interest.
More frequent compounding (monthly vs yearly) results in slightly higher returns because interest is added to the principal more often.
The Rule of 72 estimates how long it takes to double an investment. Divide 72 by the annual interest rate. At 8% annual return, your investment doubles in approximately 9 years.
Simple interest is calculated only on the principal. Compound interest is calculated on the principal plus accumulated interest, resulting in faster growth over time.
Inflation reduces the real value of returns. If your investment earns 7% annually but inflation is 3%, your real return is approximately 4%.
Historically, the S&P 500 has returned approximately 10% annually before inflation. A 7% real return (after inflation) is often used as a benchmark for long-term planning.