I couldn’t stay away from the power of compounding for long. In my Save More with Compounding post, I talked about compound interest and how my Dad referred to it as the 8th wonder of the world.
A crucial part of that power and wonder is TIME. To precisely calculate time requires an involved and complex equation. Luckily, we have the Rule of 72, which is a widely used shortcut. It helps us calculate the time needed for our compounding money to double at a certain interest rate. It works like this:
The neat thing is that the longer you save, the more money you earn from interest. Yep! You guessed it, it’s an exponential increase.
Let’s put it to the test. If I had $100 growing at 8% annually, how long would it take for my money to double?
Hmmm… 72/8 = 9
Ahhh… 9 years!
Because it’s an approximation, the Rule of 72 is only accurate for interest rates between 6% and 12%. We chose to use 8% in this chart:
As you can see, time has a huge effect on the amount of money you have. The longer you save, the more money you earn each period. To double the original amount (i.e. turn $100 into $200) will take 9 years. However, the next compounding period (the next 9 years), money earned from interest will be double what it was in the first period. That is, if you earned $100 during the first 9 years, you will earn $200 the following nine. Awesome!
Think of the Rule of 72 as a quick trick to help you calculate the time it will take for your money to double. Also, keep in mind that if you’re adding to the pot, which SaveUp encourages you to do, your money will grow even faster. Small saving now can lead to big TIME savings later!
This post was written by SaveUp’s personal finance contributing writer, Catherine B. Hawley.