Compounding Interest and The Rule of 72
Often we are fearful of investing because we think that there’s a lot of complicated mathematics that we need to know. In reality, most of the math involved in investing is actually pretty simple. When we have investments we may want to know when our money is going to double if we put cash into a stock. To calculate this, we use what is called the rule of 72.
What is the Rule of 72?
The rule of 72 is a simple math equation we use to find out how many years it will take our investment to double at a certain interest rate. This can be applied to anything which involves interest, but it’s very helpful if you have stocks or other investment vehicles.
So we use the time to double which is expressed as 72 divided by the Interest rate. For example, if you have $1,000 with a 4% interest rate you just do this: 72/4. It’s 18 years to double $1,000 at 4% interest rate. 72/4 = 18. Let’s say the interest is 12%. If we take 72/12 then it’s now 6 years to double that $1,000 dollars.
This 72 rule makes it easy to evaluate your stocks to determine when you’ll double your money. Say you have a stock portfolio and the average return is going to be 8%. You just take 72/8 and it tells you that it will take 9 years to double that portfolio if the average is 8% interest. The amount of money doesn’t matter because the rule can be applied to any dollar amount. This means it’s easier to build a portfolio because you’ll want to find the best interest rates so you make more money in less time.
If you want to make a lot of money quickly, you just look for the highest interest rate that you can get. A good rate would be 3-5% as many stocks would have that as a reasonable return. It also makes it easier to buy stocks because you’ll know when the value of your initial investment is going to double.
So in reality, it doesn’t take a long time to make a lot of money when you’re investing as long as you have a reasonable interest rate. It’s easier to see that stocks pay back way more than banks which often offer $1 interest or even less. Your money is going to work with you when you invest in stocks and especially dividend stocks as you can reinvest that money and take advantage of the interest rate to grow your initial investment even more.
Make Money by Investing Now
If you start investing now, you’re going to make a lot of money when you’re older. This is why it’s a good idea to invest as soon as you can. Compounding interest is very powerful and it can turn a small amount of money into a lot in a short time period. It’s even more beneficial if you add to the investment as you go along because you’ll be able to keep compounding it and the investment skyrockets in value.