Compound Interest: The Rule of 72
I started my investing journey after I paid off my high interest credit card debt and line of credit. During that time my husband and I had built up about 3 months savings in our emergency fund. Then we decided to start investing even though I was still paying off my student loans. We wanted to take advantage of compound interest, no matter how small are investments were.
Fast forward a couple years of investing in the stock market, I decided I wanted to learn a little more about investing. I would watch my investments go up and down but I didn’t understand how I would make returns on my money. I just knew that I needed to invest for retirement, but didn’t give much thought beyond that.
I started reading more on investing and watching YouTube videos, and learning about something called compound interest. Investopedia explains compound interest as “the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods.” It is often said to be one of the 7 wonders of the world. Below is a simple example of how compound interest works.
Compound Interest Chart
| Day 1 | $0.01 | Day 16 | $327.68 |
| Day 2 | $0.02 | Day 17 | $655.36 |
| Day 3 | $0.04 | Day 18 | $1,310.72 |
| Day 4 | $0.08 | Day 19 | $2621.44 |
| Day 5 | $0.16 | Day 20 | $5,242.88 |
| Day 6 | $0.32 | Day 21 | $10,485.76 |
| Day 7 | $0.64 | Day 22 | $20,971.52 |
| Day 8 | $1.28 | Day 23 | $41,943.04 |
| Day 9 | $2.56 | Day 24 | $83,886.08 |
| Day 10 | $5.12 | Day 25 | $167,772.16 |
| Day 11 | $10.24 | Day 26 | $335,554.32 |
| Day 12 | $20.48 | Day 27 | $671,088.64 |
| Day 13 | $40.96 | Day 28 | $1,342,177.28 |
| Day 14 | $81.92 | Day 29 | $2,684,354.56 |
| Day 15 | $163.84 | Day 30 | $5,368,709.12 |
The Rule of 72
When you invest, your money takes a little more time to double than in the above example. Which leads me to The Rule of 72. The Rule of 72 is compound interest in action! Here’s how it works. Let’s say your annual rate of return is 8%. In order for you to figure out how quickly your money will double, you will have to divide the number 72 by 8, which equals 9 years for your money to double.
If you plan to retire at 65, below is an estimate of how much you could have saved from investing.
| Age | 20 | 30 | 40 |
| Initial Investment | $1000 | $1000 | $1000 |
| Amount invested monthly | $500 | $500 | $500 |
| Rate of Return | 7% | 7% | 7% |
| Years investing | 45 | 35 | 25 |
| Retirement age | 65 | 65 | 65 |
| Total | $1,789,833.14 | $866,383.40 | $396,948.37 |
| Interest earned | $1,518,833.14 | $655,383.40 | $245,948.37 |
| Total Money invested | $271,000 | 211,000 | 151,000 |
These numbers above were inputted into this compound interest calculator.
And this is the magic of compound interest!
At the end of the day, the sooner you invest your money, the sooner it will make you the money you need for retirement. The longer you invest your money for, the more money you will have later. Be sure to read about the 3 things you need to do before investing.
It’s time to #levelupyourwealth !
-
-
3 years
Tagged emergency fund, invest, investing, millennialmoney, money