Are you aware of the miracle of ‘compound interest’ and the Golden Rule of 72?
Einstein described the miracle of compounding as “the greatest mathematical discovery of all time” and as “the eighth wonder of the world”. He definitely knew a thing or two about how the universe ticks.
John Maynard Keynes, the economist genius, described “the awesome power of compound interest”.
What amazed these men was the way in which, given enough time, even apparently trivial amounts of money can turn into spectacular fortunes. The reason is simple, but profound.
Take 1000 dollars, and invest it wisely, grow it by 10% in a year, and at the end of that year you will have 1,100 dollars.
Do the same for a second year and you will have, not 1,200 but 1,210 dollars, because your 10% return on the starting 1,100 is worth 110. Do this every year for 20 years and the return in the last year will be worth 600 dollars, and the initial 1,000 dollars will have turned into 6,700 dollars.
Now imagine that during the year you put aside another 1,000 dollars (that is only 20 dollars a week) and set it to work alongside the first 1,000 dollars.
The 19 years during which it grows at 10% a year will turn it into 6,100 dollars.
The third year’s 1,000 dollars will grow to 5,600 dollars in 18 years and so on, and so on.
In 20 year’s time, you will have amassed 64,000 dollars by simply saving 20 dollars a week.
The beauty of compound interest is that the longer you can let it work its magic the greater the rewards. Although it will take you 32 years to build this savings plan up to 500,000 dollars, by the time another 30 years has passed your fund will have more than doubled to a grand sum of 1,100,000 dollars….quite a tidy sum – and all that for just 20 dollars a week!
The motto is clearly ‘start savings now’, and do not delay…because compounding will work more in your favour the more time you have set aside for its magic.
OK, so now we know we should start saving…….. but what is this Golden Rule of 72?
Time can perform miracles with your modest savings, but then comes the revelation that if you can squeeze out a slightly better return than the 10%, then the returns are immensely compounded. That is what the Golden Rule of 72 shows you. It is the formula for showing you how many years it will take you to double your money at a rate of compound interest.
To work this out simply divide 72 by the interest rate you think you can achieve. At 7% it will take 10 years to double your money, while at 12% a year it will take just 6 years.
In those last 30 years after you have given up saving and your money is working hard while you sleep, you will double your money around four times over at 10% a year (which is how you will get from $64,000 to $1,100,000). BUT at 15% a year you would do it twice more again (which would turn $1,100,000 into $4,400,000).
Great! But there is a flaw in this argument. Or rather there is a catch…after all where on earth can you get a return of 15%, or even 10% a year, on any investment?
The Rogue Trader has some suggestions…including his latest 2 offerings (Exotica Fund 3 and Prudent Fund 3) suggesting how such returns could be achieved through investing in specialist international funds.
The trick is …stick to the profitable discipline, save regularly, and cash in on the magic of ‘compound interest’ bolstered by the Golden Rule of 72.
It is as simple as sticking to set rules, and of course keeping money flowing in the right direction, and invested those “funds for funds”.