Compounding Interest and Rule of 72

I always have one of this table handy to remind myself the beauty of compounding interest. At one glance, I would know how many times of the principal I would expect after T units of time and at a particular interest rate. For example, at 5% interest rate every dollar of principal would be compounded to $2.65 at the end of 20 years.

I guess the main aim is not be wowed by how much returns you will get if you opt for a higher interest, higher risk instrument or strategy but to appreciate how every little adds up over time. The younger one starts, the more time accumulation can take place.

1.00^365 = 1.00 Doing nothing

1.01^365 = 37.8 Doing a little a day

1.001^365 = 1.44 Doing almost nothing each day

I came across this meaningful quote recently. A person who spends no effort stays constant. Even if a person spend just some effort but on a consistent basis, the result of the accumulation turns out to be quite substantial. Last but not least, the laziest person who spends minimal effort still progress relative to the first who did nothing at all.

I believe most people would have known about the Rule of 72, which allows one to make quick mental calculation for roughly assessing when their money or loan amount would double. A quick reference to the first table and the above formula will tally that 7% interest rate will be 1.97 (roughly doubling) after 10 years.

Do note that while it is a good estimate, it is only reasonably accurate for interest rates that fall in the range of 6% and 10%. The actual formula is as above.

Compound interest requires you to sacrifice today to reap a benefit tomorrow, but the future is well worth it.

Time is on your side if you start early. It not means that you can afford to contribute a smaller amount on a regular basis, but if you do choose to contribute a higher amount from young, you might even surpass your Goal at the end unexpectedly.

Comparing 2 individuals to choose to start saving or investing the same amounts but at different age. All other factors being constant, the end-goal difference between the 2 becomes glaringly large.

This diagram not only shows the start difference between one who starts early versus another who starts off later, but also because Susan started early, even though she stops saving or investing at age 35, Bill is still trying to play catch with his periodic savings or investments from 35 to 65.

Are you convinced to start off early, today?


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