Compounding of money and the rule of 72 are the most important things an investor can grasp! So, what is the Rule of 72 and what does it have to do with compound interest? The rule simply states that if you divide 72 by the interest rate, it will tell you how long it takes for your money to double. For example, assume you earn an 8% rate of return on your money. To find out how long it takes for your initial amount of money to double, just do the calculation: 72 / 8% = 9 years. If you want to double your money in 6 years then the rule of 72 works backwards too: 72 / 6 = 12%. The rate at which you must invest to double in 6 years is 12%. Refer to the table below of a 25 year old who has $10,000 saved up in a retirement account. The account is earning 7.2% per year, so according to the Rule of 72, the money will double every 10 years. By age 35, it would be $20,000. As the decades pass, the numbers accelerate in value as they double, to a point where by retirement, a measly $10,000 has turned into $160,000. Also keep in mind, this is simply using a single starting amount with no additional money being saved. When you consider that most people would be continuously adding money to this investment, the rate of compounding goes up significantly. More on compounding this week, Finwiz.
Age | $$ |
25 | 10k |
35 | 20k |
45 | 40k |
55 | 80k |
65 | 160k |
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