Simple Math Explains Compound Interest

Simple Math Explains Compound Interest

“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t , pays it.” –Albert Einstein

07-10-2023

Einstein also referred to compound interest as the greatest mathematical discovery. Here’s a simple mathematical formula to show you why.

It’s called the rule of 72 and explains the miracle of compounding interest. The formula is so simple even a 2nd grade student could use it. The formula tells you how long it will take to double your money if you assume a specific rate of return on your investment. You simply divide 72 by the rate of return. At 8% it would take 9 years to double your money. At 10% it would take 7.2 years.

This rule can also be used to figure out what rate of return you would need to earn to double your money within a specific time frame. If your goal is to double your money in 10 years simply divide 72 by 10 to find you must earn 7.2% to reach your goal.

Pretty simple stuff. This brings to mind another great quote by Einstein…”Everything should be made as simple as possible but not simpler”.