Compound Interest is literally magical! Of course, most of you know that it means collecting interest on interest. Yeah, just another boring financial fact. However, why did we say magical? Because despite knowing the textbook definition, you probably don’t know how to use it. Much less how to optimize it and reap its full benefits. And that’s what we’ll take a look at here.
The Basics of Compound Interest
Do you know how to double your money? In case of gambling, the best advice is to fold it in half and put it back in your pocket. This also applies to a few other areas, such as day trading or risky real estate investments. However, you can avoid risking your money in uncertain project and just simply put your cash aside with a reliable fiduciary. Using the rule 72 you can simply figure out how your money will perform.
The Rule of 72 Basics
The rule of 72 helps you determine how fast you will double your money and is quite simple. Just take your interest rate, divide 72 by that number and what you get is the number of cycles it will take to double your investment. Notice how we did not say annual percentage rate (APR), because interest can be compounded annually, semi-annually, monthly, weekly, daily. It’s all up to with who and in what you invest. The image here shows an example with 6%. Meaning, if you invest $10,000 at 6% APR, it will take you about 12 years to double your money. And with interest rates offered by banks today, you are looking at more like 100+ years!
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