MEPX
Chapter 2 of 10All chapters
  1. 1Simple against compound
  2. 2The arithmetic
  3. 3The rule of 72
  4. 4Why starting early wins
  5. 5Compounding against you
  6. 6Compounding frequency
  7. 7Real against nominal
  8. 8Fees compound too
  9. 9Regular contributions
  10. 10Exponential thinking

Chapter 2 of 10

The arithmetic

Two numbers and a power.

Growth

Multiply by one plus the rate, once per period. Three years at 10 percent is 1.1 times 1.1 times 1.1, which is 1.331, so a third more rather than 30 percent.

  • The exponent is the number of periods, not the number of years, if compounding is more frequent.
  • Percentage changes multiply; they never add.

Working backwards

To find what a future amount is worth today, divide instead of multiplying. That is discounting, and it is how every valuation of future money is done.