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 and that will get you the amount of years that it will take you to double your money. In this case, the answer is 18 years.
Well said, Katherine. Let’s take a look at an example. Let’s take a $10,000 initial amount. You take that money and invest it in two no-load index mutual funds (no commissions and very low yearly fees). You select a total stock market index fund and a total bond market index fund. You decide an 80/20 allocation is right for you. That means 80% will go into the stock index fund ($8,000) and 20% will go into the bond index fund ($2,000).
Now, let’s project a 9% AFTER cost return on your money (slightly below the 9.4% historical return based on this asset allocation). Here is how it plays out. 72 divided by 9 is 8. Your money will double every 8 years.
In 8 years, $10,000 turns into $20,000. in 16 years, $20,000 turns into $40,000. In 24 years, $40,000 turns into $80,000. In 32 years, $80,000 turns into $160,000. Finally, in 40 years, $160,000 turns into $320,000. Compound interest made this happen with that initial investment of $10,000 (no other money was added).
Moral of the story? Get started NOW investing in those boring, cheap and efficient no-load index funds at a place like Vanguard. Time is your friend and compound interest will bring you wealth gradually over time. Get started NOW!
The rule of 72 helps you to find the number of years it will take you to double your money at a given interest rate. You have to divide the compound return into 72, with the result being the number of years, approximately. I used this when I was looking at investment for my retirement.
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 and that will get you the amount of years that it will take you to double your money. In this case, the answer is 18 years.
Well said, Katherine. Let’s take a look at an example. Let’s take a $10,000 initial amount. You take that money and invest it in two no-load index mutual funds (no commissions and very low yearly fees). You select a total stock market index fund and a total bond market index fund. You decide an 80/20 allocation is right for you. That means 80% will go into the stock index fund ($8,000) and 20% will go into the bond index fund ($2,000).
Now, let’s project a 9% AFTER cost return on your money (slightly below the 9.4% historical return based on this asset allocation). Here is how it plays out. 72 divided by 9 is 8. Your money will double every 8 years.
In 8 years, $10,000 turns into $20,000. in 16 years, $20,000 turns into $40,000. In 24 years, $40,000 turns into $80,000. In 32 years, $80,000 turns into $160,000. Finally, in 40 years, $160,000 turns into $320,000. Compound interest made this happen with that initial investment of $10,000 (no other money was added).
Moral of the story? Get started NOW investing in those boring, cheap and efficient no-load index funds at a place like Vanguard. Time is your friend and compound interest will bring you wealth gradually over time. Get started NOW!
The rule of 72 helps you to find the number of years it will take you to double your money at a given interest rate. You have to divide the compound return into 72, with the result being the number of years, approximately. I used this when I was looking at investment for my retirement.
Exactly, Janet. Welcome to our board. Chime in any time. All comments are welcome as we reach for that elusive thing called financial happine$$.