June 6, 2013

The rule of 72 demonstrates how compound interest can create great wealth over time. What is this rule? Example?

2 thoughts on “June 6, 2013”

  1. Katherine Graham says:

    The rule of 72 deals with the average return you are earning and how many years it will take you to double your money through compound interest. Example: You are earning 4% in a CD. You take 72/4. That will get you the amount of years it will take you to double your money. In this case, it would take you 18 years to double your money.

  2. Mike Finley says:

    Right again, Katherine. Let’s look at some real numbers. Let’s say you start with $10,000 and you are a very wise and efficient investor with the majority of your investments (70%) in no-load stock index funds and a smaller amount of your investments (30%) are in no-load bond index funds. This asset allocation has averaged a 9.1% annual return over the last 87 years before costs.

    You are wise and efficient as you cut your costs to .10% because of your use of these type of investments. This would provide you a return of 9% after costs.

    72 divided by 9% per year will take you 8 years before the money will double. $10,000 in 8 years will be $20,000, in 16 years it will be $40,000, in 24 years it will be $80,000, in 32 years it will be $160,000, in 40 years it will be $320,000. I think you get the point. Remember, we put no money into the account except that initial $10,000.

    This process explains that amazing thing called compound interest. Educate yourself, buy the right investments, keep feeding those investments consistently over time, and finally, let your money do the work. Time is your friend when you are a wise and efficient investor.

Leave a Reply

Your email address will not be published. Required fields are marked *

The Crazy Man in the Pink Wig