Compounding and the Rule of 72

Compound interest is the interest earned on both your principal amount and the interest earned from previous periods. Essentially, your money earns new money through interest, and the new money then earns more.

The Rule of 72 is a simple shortcut for calculating how long it will take an investment to double in value. Here is how you calculate it:

72 / Annual Return (%) = Years to Double

If you invest $10,000 today, here is how long it would take to double:

• At 4% return (High-Yield Savings), it will take 72 ÷ 4 = 18 years
• At 8% return (Average Stock Market), it will take 72 ÷ 8 = 9 years
• At 12% return (Great Investment), it will take 72 ÷ 12 = 6 years to double

Waiting will cost you. Consider two investors who both earn 8% returns:

• If Mike starts at 25, invests $5,000 per year, and contributes $200,000 total, then at age 65, he will have $1.4 million.
• If Tom starts at 45, invests $10,000 per year, and contributes the same $200,000 in total, then at age 65, he will have about $494,000.

Starting early matters more than investing more. Your greatest asset is not your income, but your time. Start investing now!