The Rule of 72 A Compound Interest Formula to Double Your Money
Is learning how to calculate compound interest with the Rule of 72 the secret path to wealth? It may not be the end all, but it is a major reason the rich get richer and most others do not. Investing saved money allows not only interest to be earned but over time interest is earned on the previous interest. Once you have a handle on your household budgeting, earning interest through systematic saving and investing using this powerful compound interest formula is the next step ... so learn about it now.
This article is a short primer about the benefits of putting money into accounts which pay compound interest. We need to start by seeing the basics of how simple and compound interest works.
Simple interest payments are paid on the balance of your savings or investment accounts. As the account balance grows, you are paid based on the amount of money you physically deposit, and does not include any built up interest. An example is having a $100 deposit earning 1% interest. Each year will earn $1.00 of interest. The next year I will earn $1.00 even though my account balance is now $101. This is how simple interest works.
Compound interest, on the other hand, is when interest is also applied to the previous interest as well. In our previous example, the second year I will earn interest on $101 (the original $100 plus the first years interest). So, instead of my balance being $101, my balance is now $102. This is a very simplistic explanation of simple and compound interest, but do you see how that works?
Multiply this by hundreds and thousands of dollars over many years, and you can now imagine the incredible growth this compound interest formula brings. It is a much smarter way of saving money and improving your household budgeting. A very quick way of calculating compound interest is through the Rule of 72.
Again, compound interest is the payment of interest on interest plus the amount deposited. Your money continuously "compounds" to a larger amount either yearly, quarterly, monthly, or even daily.
Can your money double this way? Yes, and to prove it learn the Rule of 72. This is a very simple interest calculation used to determine how long it will take for your deposited money to double. Here is how it works:
Take the current interest rate and divide it by 72. That's it. In our continuing example of 1% interest, applying the rule of 72 I will divide by 72 and get back 72 years for my $100 to double. Pretty pathetic, right? OK, now armed with this new tool, I am able to make better informed decisions about where to put my money. What if I could earn 5 or 8 percent interest in a different type of savings such as a CD or Money Market fund?
72 divided by 5 gives me 14 years and the same calculation using 8% interest states that my money will double in nine years. Significant difference. Remember that this presumes a yearly simple interest. It will go even faster if you are receiving monthly or even daily compound interest. Shop around, they're easy to come by.
Putting your money into one of these accounts earning compound interest is a vastly underused wealth generating secret. They will only work, however, with a regular savings that fits into a realistic personal household budgeting plan. The beauty is that it becomes a hands free automatic money saving generating system that you cannot afford to neglect.
So, learn how to calculate compound interest using the Rule of 72 and then go out and benefit. But first, be sure you have the household budgeting basics down pretty well.