Welcome to Chapter 3 of Money Moves: The Rule Of 72. The Money Moves Series is designed to be actionable with bite-sized knowledge to improve your financial well-being! Let’s explore The Rule Of 72 to help you in your investment journey.
Effects Of Compound Interest
Compound interest is interest earned on interest. As your investments earn interest, the interest is added to the initial principal amount, which then generates more interest, creating a snowball effect. This means that if you start investing early, your investments will compound earlier and help you reach your financial goals faster than starting late. However, this concept applies to loans as well, so the longer you take to repay your loans, the bigger the snowball of interest you will have to pay.
The Rule Of 72
This concept could apply to your investments that grow at a compounded rate. 72 is a number that can be used to reliably estimate the time necessary to double your principal sum invested.
Formula: 72 / (Rate Of Return Per Period) = Number Of Periods required to double the principal sum. This only works for positive interest rates such as returns on investments.
For negative interest rates such as those incurred on loans, this rule can also be used to calculate the long-term effects of costs. Instead of double the principal sum, it will be halved instead.
The Rule Of 72 gives you a better idea of how good or bad an investment is, depending on its rate of returns. This is especially important when planning for your financial goals such as retirement, child’s education, or any other milestones in life that require money from your investments. You can also use this to quickly find out how long it will take to double your investments or any potential investments you are interested in. Thanks for reading Money Moves!
Originally published at http://junronglim.com on July 19, 2021.