King Solomon once said that there’s nothing new under the sun. How appropriate that the wisest man in the Bible (who also happened to be one of the wealthiest) shared this bit of wisdom with us. You don’t have to have the wisdom of Solomon to appreciate the benefits of what I’m about to share with you.
I’m talking about the concept known as the “Rule of 72”. It’s been around for years and years, it’s common to find it in textbooks and other materials, but it is often overlooked – a good example of missing the forest for the trees. Albert Einstein said that “Compound interest is the most powerful force in the universe.” (Source: Albert Einstein, as quoted in Dow 40,000 , David Elias, 1999)
So what is this “Rule of 72?” It’s a simple mathematical principle that allows you to approximate the length of time to double an initial investment at a particular interest rate (up to around 14%). Referring to the chart below, there is a large difference between a 6% return and a 12% return. You would think that by doubling the rate of return, you would double your money. However, as you can clearly see, it actually quadruples. That’s the power of compound interest.
The typical American earns enough money to retire with financial independence, but they give it all away to banks and credit card companies instead of making it work for them. The average credit card rate is currently at 13.54% (Source: Credit Cards.com, 2008) and Americans are averaging $16,635 in debt, excluding mortages, according to Experian.
As with everything in life, compound interest will be either the fuel that propels your vehicle successfully towards financial independence and a happy retirement, or it will be the raging, out of control fire that burns your financial house down.
What are your thoughts on the Rule of 72 and compound interest?
Karen blogs about her daily life at Simply Amusing Blog.
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My husband and I are around 30, and are in the process of paying off debt & planning our retirement savings. We're trying hard to get compound interest to work FOR us, instead of against us!
Very well explained. Thanks!
I learned about this in Dave Ramsey's Financial Peace U. Unfortunately, I'm still on Baby Step 1. This is really good information. Thank You!