Albert Einstein, famous for being one of the
sharper tools in humanity's shed, was once asked what the most powerful force
in the universe was. He replied, "Compound interest." He
had a point. Compounding is without a doubt a critical ally in the
never-ending fight to ensure your retirement runs out before your money
does. But exactly how powerful is it? And how fast can compounding
grow your nest egg? There's a quick and simple thumbrule to figure it
out: the Rule of 72.
It works like this.
Just divide your interest rate (or growth rate, whatever you have that’s
compounding) into 72, and the answer is the number of years it will take for
your money to double. Simple. So if you have an 8% rate, your money will
double in about 9 years. At 3%, about 24
years. It’s not exact, just a
thumbrule. The math falls apart at
higher rates, but it’s fairly accurate at reasonable rates you might actually
have.
Wikipedia has a pretty good explanation of the math
that makes it work, here,
and there’s also this
video on Investopedia that explains it fairly well. This shortcut has been around for
centuries. With a little luck and some really
good planning, your savings can be, too.
Remember, it’s not timing the market that counts, but time IN the
market. Happy investing.
