Why is that we go through high school and even college, that teachers and professors don't talk about the Rule of 72? And when they do to teach it, they briefly go over it and say "its not important on the exam." That's great there's one less question on the exam because calculating it is so simple. But in real life, this can have a big impact on your view on savings accounts, CDs, and investments.
What is the Rule of 72? Rule of 72 is a mathematical formula that tells you how long it will take for your money to double given the interest rate. This formula was discovered by Albert Einstein, who is one of the most brilliant physicists genius in the entire history of civilization. Let's say the average yield or interest rate on a savings account is 3%. 72 divided by 3 = 24. If you put in $1000 now in the bank and never touch it again, it will take 24 years for your $1000 to become $2000. Stinky isn't it?
What if you put it into CDs? CD's have an average yield of 6%. 72 divided by 6 = 12. It will take 12 years for your $1000 to become $2000. A little bit better, but still a little slow.
What if you put into mutual funds and it historically earn a 12% rate of return in the past 25 years? 72 divided by 12 = 6. It will take 6 years for your $1000 to become $2000. How great is that?
Now you seen the various ways you can save your money, which one makes more sense to you? What interest rate or average rate return are you earning on your money? How many doubling periods do you have left until you retire?
"Compound interest is the most powerful force in the universe" -Albert Einstein
If you don't believe that, then take a look at this:
Let's say you open a Roth IRA and you invest $200/month into it. Lets say your IRA portfolio earns an average rate of 10%. If you begin investing at age 25 and you retire at age 60, you will have: $765,655. Let's say you retire at age 60 and you withdraw $4000/month from your IRA. By age 65, if your portfolio continues to earn 10%, you will have: $947,410. If you continue to invest $200/month instead of withdrawing $4000/month, you would of have: $1,275,355 at age 65.
Anyway, lets say you starting withdrawing $4000/month at age 60. If your IRA continues to earn an average rate of 10%, at age 75, you will have: $1.7 million! Even though you stop contributing at age 60 and started withdrawing $4000/month, your investments continue to grow.
