The principle behind it is quite simple: over time, compound interest leads to exponential growth of the money invested. This makes this concept a powerful tool that even small investors can use. It also motivates long-term investments, as this allows assets to grow significantly over long periods of time.
If you want more precise results, you can use the so-called rule of 72. This simple rule of thumb shows how long it takes for an investment to double at a certain annual interest rate. The rule is particularly helpful because it provides an approximate answer quickly and without complicated calculations.
All you have to do is divide 72 by the interest rate to determine the doubling time. For example, if you make an investment with an interest rate of 6 percent per year, divide 72 by 6, which gives you 12. This means that it will take about twelve years for your invested capital to double.
It is important to note that the Rule of 72 provides a good approximation as long as interest rates are between about two and twelve percent. The rule may be less accurate when interest rates are very high or very low.
*The original of this article first appeared at our partner Futurezone.de.
