Rule of 72: If you think that rich people increase their wealth by taking big risks or using some ‘magical’ scheme, then you are wrong. The real game of wealth creation is not in any secret plan, but in the law of time and compound interest, which is known in the financial world as the ‘Rule of 72‘.
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This is a very simple formula that tells you how many years it will take for your invested amount to double.
The magic of compound interest
Compound interest, or compounding, is often called the eighth wonder of the world. This means that in this, interest is earned not only on your original amount, but also on the interest earned on that amount. This process gradually grows like a snowball and your amount starts to grow very rapidly over time.
What is the ‘Rule of 72’?
72\Annual Return(%) = Estimated Years to Double Your Money
Annual Return Rate Years to Double Your Money
2% 36 Years
8% 9 Years
10% 7.2 Years
12% 6 Years
This means that if an investment earned a steady 12% a year, it would take about 6 years to double. Real returns vary year to year.
Small Difference, Big Impact
The ‘Rule of 72‘ is based on the power of compound interest. That is, the return is added to your principal amount every year and interest is earned on it again. According to this rule, even though there is only a 4% difference between an 8% and a 12% return, after 30 years that same 4% difference can earn you three times as much money! This is the effect of compound interest. A difference of 1 to 2% in interest rates may seem small at first, but in the long run, that same difference can set your financial progress back or forward by several years.
The Reward of Patience and Discipline
This rule shows why time matters in compounding. Investing regularly with patience and discipline is a common approach, though returns are never guaranteed.
Investments in the securities market are subject to market risks. This article is for education only and is not investment advice.
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