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Compound Growth and the Rule of 72

04 August 2023

When you start investing early, your money has more time to grow and benefit from compound growth or interest. You produce returns on the money you put in at the start, as well as the money you add later, plus on all the growth/interest the mutual fund produces over time. This gives you a larger total amount to earn future returns on, leading to even more growth.

The Rule of 72 is a simple formula that is used to estimate the number of years required to double the invested money at a given annual rate of return. The Rule of 72 applies to compounded interest rates and is usually accurate for interest rates that fall in the range of 6% and 10%. It is not always exact, but it comes in handy for mental calculations to quickly calculate an approximate value.

Let’s say you have an investment that earns 8% per year. Using the Rule of 72, you can estimate that it will take approximately 9 years for your investment to double (72 / 8 = 9).

If your investment return is not guaranteed, your doubling time will change as the expected return changes. The Rule of 72 is often taught to beginning investors as it is easy to comprehend and calculate.

Put the power of compound growth to work for you by investing early, contributing regularly and by not taking money out.

Cindy C. - Financial Blogger

Cindy C.