First, let me tell you why you should know this topic,
Compounding interest is a powerful tool that can go against you or work for you. If you don't know how this works, you're missing out on the world's powerful way of getting rich.
“The most powerful force in the universe is compound interest” - Albert Einstein
Wikipedia says,
Compound interest arises when interest is added to the principal, so that from that moment on, the interest that has been added also itself earns interest. This addition of interest to the principal is called compounding. A bank account, for example, may have its interest compounded every year: in this case, an account with $1000 initial principal and 20% interest per year would have a balance of $1200 at the end of the first year, $1440 at the end of the second year, and so on.
In order to define an interest rate fully, and enable one to compare it with other interest rates, the interest rate and the compounding frequency must be disclosed. Since most people prefer to think of rates as a yearly percentage, many governments require financial institutions to disclose the equivalent yearly compounded interest rate on deposits or advances. For instance the yearly rate for a loan with 1% interest per month is approximately 12.68% per annum (1.01^12 - 1). This equivalent yearly rate may be referred to as annual percentage rate (APR), annual equivalent rate (AER), annual percentage yield, effective interest rate, effective annual rate, and by other terms. When a fee is charged up front to obtain a loan, APR usually counts that cost as well as the compound interest in converting to the equivalent rate. These government requirements assist consumers to compare the actual costs of borrowing more easily.
For any given interest rate and compounding frequency, an "equivalent" rate for any different compounding frequency exists.
Compound interest may be contrasted with simple interest, where interest is not added to the principal (there is no compounding). Compound interest is standard in finance and economics, and simple interest is used infrequently (although certain financial products may contain elements of simple interest).
If this is a lot to handle, just think about the RULE OF 72. This is an estimation of time to double your money.
Formula: 72/interest rate
For example: If you wish to know how many years will it take for your Php100 to become Php200 if invested in a time deposit just divide 72 by bank's annual(yearly) interest rate, let's say 3%.
Therefore: 72/3 = 24years
*as you can see it is irregardless of how much money you save, the important thing here is the interest rate. It will take 24yrs for your money to double if invested at 3% interest per year.
Would you like to be wealthy?