Compound interest has been described as the “eighth wonder of the world,” but many investors don’t fully grasp its power. And while it seems ridiculous to think that someone could turn $1 into $1 million within a single lifetime, it’s actually a mathematical certainty, given a high enough interest rate and enough time to benefit from it.
Even if you think you fully understand what compound interest is and how it really works, take this simple five-question quiz to see where you stand. You might be surprised at some of the answers and gain a new respect for the power of compound interest.
Last updated: Aug. 27, 2021
1. What Is the Difference Between Simple and Compound Interest?
- Simple interest is earned on principal only
- Compound interest is earned on both principal and already-accrued interest
- Simple interest is the best type of interest for maximum returns
- Compound interest only applies to investments that pay a dividend
- Answers 1 and 2 only
- Answers 1 and 4 only
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Answer: Answers 1 and 2 Only
Simple interest and compound interest are actually very similar. However, the big distinction is that simple interest is only paid on your principal amount. If you reinvest your simple interest, however, it becomes compound interest, as you’ll then be earning interest on the amount you have reinvested as well. Think of it this way: If you have money in a savings account at a bank and you take your distributions as cash payouts, your principal will always remain the same, as you’re withdrawing your interest payments. However, if you keep that money in the bank, the interest will keep compiling, earning interest upon interest. As your balance grows every month, so, too, will the amount of interest that you earn.
2. At 15% Per Year, How Long Will It Take $1 To Turn Into $1 Million With Compound Interest?
- 13 years
- 48 years
- 99 years
- 124 years
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Answer: 99 Years
Ninety-nine years might seem like a long time, but if you think about it in terms of $1 growing to $1 million, it’s actually quite extraordinary. When you’re talking about earning one million times your original investment, 99 years isn’t really that long to wait. Granted, you’re not likely to consistently earn 15% per year on your investments, but it’s certainly possible.
3. At 15% Per Year, How Long Will It Take $1 To Turn Into $1 Million With Simple Interest?
- 242 years
- 1,242 years
- 697,000 years
- 1.89 million years
- 44.56 million years
- 66.67 million years
Answer: 66.67 Million Years
The answer might as well be “never,” because 67 million years is about how long it has been since dinosaurs roamed the Earth. With simple interest at 15% per year, you’d earn a steady stream of 15 cents annually on your initial $1 investment. Without reinvesting that payout to garner the benefit of compound interest, you wouldn’t reach $1 million until the next geological epoch.
4. How Long Would It Take To Turn $1 Into $1 Million With 20% Annual Compound Interest?
- 13 years
- 48 years
- 76 years
- 124 years
- 418 years
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Answer: 76 Years
If you could bump your annual return up to 20% from 15%, which isn’t that huge of a jump, you could actually see your $1 turn into $1 million within the course of your lifetime. After 76 years, compound interest at 20% would amazingly turn that $1 into $1,041,776.84. What’s perhaps most interesting to note in this calculation is how much of this gain comes in the very final years. After 70 years, a 20% annual return only turns $1 into $348,888.96, but that amount nearly triples in just the next six years.
5. At 15% Per Year in Interest, How Long Will It Take To Pay Off a $10,000 Credit Card Debt, Making Minimum Payments of 2% of the Outstanding Balance Every Month?
- 5 years
- 9 years
- 14 years
- 19 years
- 26 years
- More than 30 years
Answer: More Than 30 Years
Compound interest works both ways, which is why holding high-interest debt is crippling to long-term financial plans. If you have $10,000 in debt at 15% and only make minimum payments, you’ll still have a balance of $651 after 30 years, even after making $25,573 in payments — or more than 2.5 times your original balance. Considering many credit cards actually charge 18% or even more in interest, it’s easy to see how devastating compound interest can be when it’s working against you.
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