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Level 1: Beginner · Money Basics
Interest and compounding
6 min read · Before you start: Lesson 5 · Updated 31 October 2026
Interest is the price of money over time. It is paid to you on savings and charged to you on borrowing, and in both directions the mechanism is identical. Understanding it is the single piece of arithmetic that explains the most about personal finance.
Simple and compound
Simple interest is calculated on the original amount only. TT$10,000 at 5 per cent simple interest earns TT$500 every year, indefinitely.
Compound interest is calculated on the original amount plus the interest already added. The same TT$10,000 at 5 per cent compounded annually:
- Year 1: TT$10,500
- Year 5: about TT$12,763
- Year 10: about TT$16,289
- Year 20: about TT$26,533
- Year 30: about TT$43,219
After 30 years, simple interest would have produced TT$25,000. Compounding produced over TT$43,000 from the same deposit at the same rate. The difference is interest earning interest.
The formula
Future value = Present value × (1 + r)n, where r is the rate per period as a decimal and n is the number of periods. A calculator handles it, and the savings growth calculator on this site does it for TT dollars.
The Rule of 72
Dividing 72 by the annual rate gives roughly the years needed for money to double.
- At 2 per cent: about 36 years.
- At 6 per cent: about 12 years.
- At 12 per cent: about 6 years.
It works in reverse for borrowing. A debt at 24 per cent that goes unpaid doubles in roughly three years. It is also a quick check on any claim: an offer promising to double money in a year implies a 72 per cent annual return, which is a figure worth treating with considerable suspicion.
Time is the ingredient that cannot be bought later
Two savers, both putting aside TT$1,000 a month at 6 per cent:
- Starting at 25, stopping at 35. Ten years of contributions, TT$120,000 in total, left alone until 60.
- Starting at 35, continuing to 60. Twenty-five years of contributions, TT$300,000 in total.
The first saver contributes far less and, at a steady 6 per cent, finishes in a comparable position because the early money compounds for an additional decade. The general lesson is that the first years contribute disproportionately, which is the argument for starting with a small amount now rather than a larger amount later.
How often it compounds matters
The same nominal rate produces different outcomes depending on the compounding period — annually, quarterly, monthly or daily. More frequent compounding produces a slightly higher effective rate. This is why the comparable figure for savings is the effective annual rate and for borrowing the annual percentage rate, since both express the real cost over a year on a common basis.
The same force, working against you
Credit card interest compounds, usually monthly, on balances carried forward. A TT$15,000 balance at 24 per cent a year, with only the minimum paid, takes years to clear and costs more in interest than the original purchases. The mechanism producing TT$43,000 from TT$10,000 in the savings example is the one producing that outcome.
Lesson 15 shows a further trap: a loan quoted at a flat rate is calculated on the original amount for the whole term, even as the balance falls, so it costs considerably more than the same number quoted as a reducing-balance rate.
Test yourself
What makes compound interest different from simple interest?
Using the Rule of 72, roughly how long does money take to double at 6 per cent a year?
An offer promises to double your money in one year. What does the Rule of 72 suggest about it?
Not financial advice. This lesson is general education only. See our editorial policy and disclaimer.