The Rule of 72 for Compound Interest

Day 307 / 365

Compound Interest is an extremely powerful thing, and yet most people don’t utilize it to its full advantage. Here’s what Einstein had to say about Compound Interest.

Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.

What’s so special about Compound Interest? Let's look at simple interest first. If you put 100 rs in an account that gives you 8% simple interest, that means that each year you would get 8 Rs (8% of 100) as interest. So your money will grow like — 108, 116, 124 ….

However, if the interest was compounded, that means that interest will be calculated each year on the total amount. So interest for the first year would be 8% of 100 i.e. 8. But for the next year, interest would be 8% of 116 and so on.

While this might not seem like a substantial difference as it is. Let’s consider how long will it take you to double your money in both cases.

For the simple interest, it’s easy. You get 8 Rs interest each year, so to double your money you would need 100/8 i.e 12.5 years.

Now for Compound Interest, the calculation is a bit more complicated. But there’s a rule of thumb that can help you approximate how long it will take you to double your money. It’s simple, just divide 72 by the interest rate that you are getting. So at an 8% interest rate, it will take you just 9 years to double your money.

By the same formula, in the next 9 years, your investment would have grown 4 times.

This post is part of my 365 Day Project for 2019. Read about it here

Yesterday’s blog — The Irish Potato Famine