Compound Interest & Rule of 72

First things, first …  What is compound interest?

Compound interest is the interest you earn on interest. This is illustrated with basic math: if you have $100 and it earns 5% interest each year, you'll have $105 at the end of the first year. At the end of the second year, you'll have $110.25. Not only did you earn $5 on the initial $100 deposit, but you also earned $0.25 on the $5 in interest. While 25 cents may not sound like much at first, it adds up over time.  If you never add another dime to that account, in 10 years you'll have more than $162 due to the power of compound interest, and in 25 years you'll have almost $340.

Secondly, what is the Rule of 72?

The Rule of 72 estimates how your investment will grow over time.  It’s a simple accurate approximation of the length of time it takes for your investment to double in value.  If you know the interest rate, the Rule of 72 tells you approximately how long it will take for your investment to double in value.   All you got to do is divide the number 72 by your investment’s expected rate of return (interest rate).   For example, an expected rate of return of 9%, your investment will double in value about every 8 years (72 divided by 9 equals 8)

This rule applies equally applies to credit card debt as well as fees charged by your investment advisor.  So, if you have $10,000 of credit card debt with the interest rate at 18% that debt will increase to $320,000 in 20 years.  No surprise that you get inundated with offers from so many credit-card companies. 

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