Let’s look at two similar problems:

A. Calculate the future value (in fifteen years) of $5,000 that is earning 10 percent; assume an annual compounding period.

B. Calculate the future value of $5,000 that is earning 10 percent; assume simple interest (the interest earned does not earn interest).

C. How much did interest on interest earn in the first problem?

A. To solve this problem, we must consider compound interest. On your calculator, clear your registers and your memory. Set -$5,000 as the present value (PV), 10 percent as the interest rate (I), and 15 as the number of years in the future (N); then solve for the future value (FV), which is $20,886. With a standard calculator, the result is 5,000 * (1 +.10)¹⁵, or the same sum of $20,886.

B. To solve for simple interest, which does not accrue interest on interest, it is easiest to use a standard calculator. First, calculate your annual interest, which is $5,000 times 10 percent (5,000 *.10), or $500. Multiply $500 by 15 years; the result should be $7,500. Then add the amount of the original investment of $5,000 to get $12,500.

C. The difference between $20,886 and $12,500 is $8,386, which is the amount of interest that your interest has earned. This concept is the key to financial success—earn interest on your interest. Elder L. Tom Perry repeated what someone told him about interest when he said, “Thems that understands it, earns it; and thems that don’t, pays it” ( “Becoming Self-Reliant,” Ensign, Nov. 1991, 64). Let’s earn interest rather than pay interest!