How does compound interest work?
Welcome back!
Compound interest has often been described as the eighth wonder of the world and when you see how it works you may consider it so.
It has often been described that if you had a plan to double your money you could refer to the rule of 72.
The rule of 72 refers to the amount of return on your money to actually double your return, it works on the term that if you reinvest your money it will double providing you hit 72% return on your investment.
Of course if you did this in a year or within several years it does not work but generally in excess of 4 to 5 years it will prove pretty accurate.
A good example is if you wanted to double your money in ten years then if you earned 7.2% per annum you would double your return.
A 7.2% per annum return in the past few years would have been perceived as very low but at the moment I am sure most investors would jump at the chance.
Next time you plan your investment return remember the rule of 72.