The Rule of 72: A Simple Way for New Investors to Understand Compound Interest

If you're new to the world of investing, you may have heard the term "compound interest" thrown around, but you might not fully understand what it means or how it works. The concept of compound interest can be a bit confusing, but it's an important one to understand, especially when it comes to investing.

One simple way to understand compound interest is through something called the "Rule of 72." This rule states that if you divide the number 72 by a given interest rate, you will get an estimate of how long it will take for your money to double at that rate. For example, if you are earning a 6% annual return on your investments, it will take approximately 72 / 6 = 12 years for your money to double.

Before deciding whether to invest or keep your money in a savings account, it's a good idea to take a look at the rate you are earning on your savings account. The average savings account rate is currently around 0.05%. Using the Rule of 72, we can calculate that it would take approximately 72 / 0.05 = 1440 years for your money to double at this rate.

On the other hand, a typical balanced fund (consisting of a mix of stocks, bonds, and cash) has averaged around 8% per year over the past 30 years. Using the Rule of 72, we can calculate that it would take approximately 72 / 8 = 9 years for your money to double at this rate.

While investing carries some level of risk, as the markets go up and down over time, the potential for higher returns through compound interest may make it a more attractive option for growing your money in the long run. It's important to carefully consider your financial goals and risk tolerance before deciding how to invest your money.

If you're ready to start building your financial future, we encourage you to get in touch with our team at FS2. Our experienced advisors can help you create a tailored investment plan that takes into account your specific financial goals and risk tolerance. Don't wait – take control of your financial future today!