Simple versus compound
Simple interest pays only on principal: 20,000 at 6% for 5 years earns 6,000. Compound interest pays on accumulated interest too, and at monthly compounding the same terms earn about 6,977 — 16% more, purely from reinvestment.
The rule of 72
Divide 72 by the annual rate to approximate doubling time. At 6%, money doubles in about 12 years; at 9%, about 8 years. It is the fastest sanity check in finance.
Where compounding frequency hides
- APR includes fees; the nominal rate does not
- Credit cards compound daily — the effective rate is well above the quoted APR
- Savings accounts quote APY, which already includes compounding
- Loans amortise, so interest is front-loaded even at a fixed rate
Business context
For inventory financing, compare the cost of capital against the margin the inventory generates per cycle. If a 6% loan funds stock that returns 30% per cycle, borrowing is rational; if it funds slow-moving stock, the interest is a compounding loss.
Frequently Asked Questions
What is the difference between APR and APY?
APR is the nominal annual rate; APY includes compounding and is higher.
Does daily compounding matter at small balances?
Less than at large ones, but over decades the difference is material.
How do I calculate doubling time?
72 ÷ annual rate gives the approximate number of years.
Assumptions & disclaimer
Results are estimates for planning. Fee schedules, tax brackets and deduction limits change; confirm current figures with the marketplace, the IRS or a qualified accountant before making decisions. Nothing here is financial, tax or legal advice.
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