❓ Frequently Asked Questions
What is compound interest and how does it work?
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Compound interest is interest earned on both your principal and accumulated interest. For example, if you invest $10,000 at 7% annual return, after year one you'll have $10,700. In year two, you earn 7% on $10,700, not just the original $10,000. Over 30 years at 7% return, $10,000 grows to $76,123—much more than with simple interest.
Why is compound interest important for long-term investing?
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Time is the most powerful factor in compound growth. Starting to invest in your 20s instead of 30s can result in hundreds of thousands of dollars more by retirement, even with the same monthly contributions. The extra 10 years nearly doubles your wealth through the power of compounding.
What is the Rule of 72?
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The Rule of 72 is a quick mental math tool: divide 72 by your annual return percentage to estimate how long it takes to double your money. For example, at 8% annual return, 72÷8=9 years to double. At 6%, it takes about 12 years. This helps you evaluate investment options and understand the impact of different return rates.
How do monthly contributions affect compound growth?
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Regular monthly contributions dramatically accelerate wealth building through dollar-cost averaging and compound growth. For example, $200/month invested for 30 years at 7% return grows to $383,000. Consistent contributions ensure you benefit from compounding across your entire investment period.
What average return should I expect from stock market investing?
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Historical data shows the S&P 500 averages around 10% annual returns (including dividends) over long periods, but with year-to-year volatility. A conservative estimate for planning is 7-8% for diversified stock portfolios. Bond investments typically return 4-5%. Remember that past returns don't guarantee future results.