Rule of 72 & Compound Interest
June 27, 2009
The rule of 72 is a formula that can help you approximate how your investments will grow in a retirement or other investment account.
The rule has its history in the 15th century and reached common knowledge when Albert Einstein explained his thoughts on the power of compounding interest. Basically, the rule calculates how long it takes to double your money at any given rate of return.
For example, if you contribute a deposit into an investment account, and you anticipate a rate of return of 8%, simply divide 72 by the rate of return and you will have the number of years it will take to double your money. This rule assumes that interest is compounded annually.
72 ÷ 8 = 9
You can also use the rule of 72 to also determine the rate of return needed to double your money over a specific period of time. For example, if you have $10,000 that you want to double for college tuition in 10 years, dividing 72 by 10 will give you the rate of return you’ll need annually compounded to reach that $20,000 goal.
72 ÷ 10 = 7.2%
Now go out and compound some interest!
That’s one of those concepts that should be hammered into every kid in school…
I know it has always amazed me
It’s considered as the 8th wonder of the world! Great invention of mankind!
Rule of 72 rules