Understanding the basics empowers better financial decisions.
Compound interest means the interest you earn is added back to your principal, so you earn interest on both the original principal and the accumulated interest. Over time this leads to exponential growth. Future value is calculated as FV = P × (1 + r/n)n×t, where P is the principal, r the annual rate, n the number of compounding periods per year and t the number of years.
The Rule of 72 gives a rough estimate of how long it takes to double your money at a given rate. Divide 72 by the annual return r % to get the number of years. For example, at 9 % return, 72 ÷ 9 ≈ 8 years.
Simple interest is calculated only on the principal, yielding the same interest amount every period. Compound interest adds interest to the principal each period, so earnings grow faster and the effect becomes significant over longer time horizons.
After a loss, you need a larger percentage gain to break even. A 50 % loss requires a 100 % gain to recover. In general, if your loss is x %, you need x ÷ (100 − x) × 100 % to get back to your original level.
Investing all your capital in one asset is risky. Diversifying across asset classes reduces risk, and rebalancing helps maintain your desired allocation as markets fluctuate.
Taxes and fees can significantly impact your returns. Always consider tax rates and transaction costs when evaluating your investment’s net profit.