Compound Interest & the Rule of 72

“Compound interest is the Eighth Wonder of the World. He who understands it, earns it … he who doesn’t … pays it.”

– Albert Einstein

 

Compound interest is paid on the initial principal and also any interest that is accumulated for previous periods of a deposit or loan. When Albert Einstein discovered the rule of 72 which applies to compound interest, he was instantly awed at the wonder of it. He believed that anybody can make use of compound interest to grow their wealth. So, what is the rule of 72?

To put it simply, the rule of 72 helps us to calculate the required time to double our wealth. The formula below explains:

72 / Rate of Investment Return = No. of Years to DOUBLE your Money

If you have $20,000 and this amount of money reaps you an investment return of 3%, you will required 24 years for it to grow to $40,000, twice the size of your initial investment. So, if you can achieve a higher rate of return of say 7%, you will only require 10 years for the same $20,000 to double.

The difference between an investment that yields 3% and an investment that yields 6% may seem small in a one-year period. But compound this for 40 years and the difference will be immense. The table below illustrates this (assuming an initial capital of $20,000):

Number of Years

3% Investment Yield

6% Investment Yield

5

$23,200

$26,800

10

$26,900

$35,800

20

$36,100

$64,100

30

$48,500

$114,900

40

$65,200

$205,700

 

Therefore, if you wish to achieve financial freedom and retire as early as possible, it is crucial to understand how compound interest works to help you grow your money. By keeping your money invested, your returns compound. The longer you stay invested, the greater the compound effect.

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Author: Wei Lian

I hope that you will find this site useful and informative. Have a nice read!

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