Retirement Planning - How the Rule of 72 Affects Your Investments
- By Dave Schloss
- Investing
-
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Dave Schloss
Dave Schloss is a former financial advisor who helped thousands of people become more financially independent through his seminars, audio programs, articles and individual counseling. He has had over 100 financial articles published in newspapers and magazines throughout the country. He is also the author of “Grow Your Own Money Tree!”, a 45 minute CD which takes the most powerful information from his consulting years and presents it in an easy-to-understand format for both novices and experienced investors.
http://daveschloss.com
Retirement Planning - How the Rule of 72 Affects Your Investments
If you want to maximize your retirement nest egg, it's important to understand how compound interest and "the rule of 72" affect your investments.
The rule of 72 is a mathematical formula that calculates approximately how long it would take your money to double, by dividing the interest rate you're earning into the number 72.
The number that results from doing that is the number of years it takes for your money to double.
For instance, if you were able to earn a 6 percent annual average rate of return on an investment, you would divide 72 by 6, which would give you 12.
That means that if left alone, your money should double in approximately 12 years. In 36 years, your money would double three times: If your original amount was $1,000, it would become $2,000 in 12 years.
Then the $2,000 would double to $4,000 in 24 years. Eventually that $4,000 would double to $8,000 in year 36.
If you think that's a lot, imagine if I could make 12 percent for those 36 years.
That would cause the money to double every 6 years (72 divided by 12). If you work through the numbers you will see that the total in 36 years would be $64,000 instead of the $8,000 you got at 6 percent.
Wow! Doubling the interest in this example would mean making eight times the money.
If you have some time on your hands, work through the example using an 18 percent return. (The money would double every 4 years.) Just be sure to sit down when you do the math.
As you can see, the difference of a few percentage points over a lifetime can result in thousands of dollars of additional money for your nest egg.
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