![]() ![]() Because 36÷6=6, it will double six times. Tap "answer" below when ready to check your comprehension. Got the hang of the Rule of 72? Try estimating how $5,000 would grow at 12% over 36 years. Using compound interest calculator: Close again $5,000 would be worth about $79,840 after 36 years.After 27, that amount doubles to $40,000. After 18 years, that amount doubles to $20,000. Your money will double four times in that period (36÷9=4)! The first nine years, it doubles to $10,000. That means your $5,000 would double in about nine years. How long will it take to double your money at 8% interest? The calculator shows $5,000 would be worth about $10,200 after 36 years. Using compound interest calculator: The result is pretty close.Using the Rule of 72: We know that 72÷2=36, so $5,000 would double to $10,000 during our 36-year time frame.How would your investment grow after 36 years with a 2% versus 8% interest rate? (We’ll assume you don’t make any additional contributions to the principal and that interest is compounded annually.) How long will it take to double your money at 2% interest? Let’s say you wanted to set aside $5,000. You can also use the Rule of 72 to approximate how much an amount would grow over a time period. At a 12% interest rate, it would only take six years to double your money. At a 2% interest rate, it would take 36 years to double your money. Simply divide 72 by the interest rate to determine the outcome. The Rule of 72 is an easy compound interest calculation to quickly determine how long it will take to double your money based on the interest rate. Let’s run through a few examples to better understand the power of compound interest for savers. I’d argue that taking advantage of compound interest is the single most powerful action that an individual investor can leverage to build wealth. This is how credit card debt can balloon if left unchecked. Savings vehicles such as certificates of deposit typically pay compound interest.įor borrowers, it means that owed interest is being calculated on your unpaid balance, plus on previous interest charges left unpaid. Compound interest is sometimes described as “interest on interest” because earned interest essentially gets added to the principal over time. įor more money activities for your child, visit our Money As You Grow section.Compound interest is sometimes described as “interest on interest.”įor savers, it means earning interest on your original principal-plus on the interest your investment generates. You can also crunch some numbers using different rates, periods of time, and compounding frequencies, at the Securities and Exchange Commission’s website. For example, if you had $1,000 that was earning a 6 percent return, it would grow to $2,000 in 12 years (72 divided by 6 equals 12). ![]() It uses the rule of 72, which basically says if you divide 72 by your rate of return, you’ll find out how fast your money will double in value. It’s for a slightly older audience – probably college students – but it illustrates compounding in way that most pre-teens and teens would understand. You can also watch this video by the Financial Literacy Center, a joint center of the RAND Corporation, Dartmouth College and the Wharton School. That could help boost your child’s “interest.” But if you want to encourage your child to save, consider adding a matching contribution – say, 25 cents for every $1 saved. TIP: It’s hard to find accounts or real-world investments that pay a steady 5 percent or 10 percent return. Then run through a simulation like the one above, calculating the next interest payment on the principal-and-interest total each time. You can teach compounding using your own change jar and there are lots of good resources on the web.įor the low-tech method, dump your change jar out on the floor and tell your children they will invest $1 at 10 percent interest. Increasing the compounding frequency or your interest rate, or adding to your principal, can all help your savings grow even faster. That’s because the next interest payment equals 5 percent of $1,050, or $52.50. The second year, you would have $1,102.50. After the first year, you would have $1,050 – your original principal, plus 5 percent or $50. So let’s say you invest $1,000 (your principal) and it earns 5 percent (interest rate or earnings) once a year (the compounding frequency). ![]()
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