Compound interest
When what your money earns starts earning too. Slow and boring for years, and then abruptly not.
In the chapter
PPlan
The big decisions and the distant ones
From the same chapter
- Financial goalAn amount and a date. Without both it is not a goal but a wish, and there is no way to work out how much to set aside.
- Time horizonWhen you will need that money. It decides where it can sit: what you need in two years cannot be where it can fall 40%.
- Time value of moneyOne unit today is worth more than one unit a year from now, because today it can be put to work. Everything else follows from this.
- Simple interestAlways calculated on the initial amount. The gap with compounding is negligible in year one and vast by year twenty.
- Rule of 72Divide 72 by the annual return in percent to get the years it takes money to double. At 6%, twelve years.
- MortgageA very long-term loan secured on the home itself. The term matters as much as the rate: stretching it lowers the payment and raises the total enormously.
- Down paymentThe share of the price you put in yourself. The larger it is, the less you owe and the less the loan costs in total.
- Debt-to-income ratioWhat share of your monthly income goes to servicing debt. Above a third, any surprise turns into a problem.