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Rule of 72
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Rule of 72
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Disclaimer: Results are estimates for educational purposes only and should not be considered financial advice. Consult a licensed financial advisor before making investment, mortgage, or major financial decisions.
Compound interest is the process of earning interest on both your original principal and the interest already accumulated. Often called the "eighth wonder of the world," it is the core mechanism behind long-term wealth building. The longer your money compounds, the more dramatically it accelerates — which is why time in the market matters far more than timing the market.
Compound Interest Formula
A = P(1 + r/n)^(nt)
A = final amount (principal + interest)
P = principal (initial investment)
r = annual interest rate (decimal form)
n = compounding periods per year (12 = monthly)
t = time in years
Initial investment: $10,000 | Annual rate: 7% | Compounding: Monthly | Time: 30 years
A = 10,000 × (1 + 0.07/12)^(12×30) = 10,000 × (1.005833)^360 = $81,221. Your $10,000 became $81,221 — $71,221 of pure compound interest. With simple interest at the same rate, you would only have $31,000.
Simple interest is calculated only on the original principal. Compound interest is calculated on the principal plus all previously accumulated interest — meaning your interest earns interest. On a $10,000 investment at 7% for 30 years: simple interest yields $31,000 total; compound interest (annual compounding) yields $76,123 — more than double.
The compound interest formula is A = P(1 + r/n)^(nt), where A is the final amount, P is the principal, r is the annual interest rate (as a decimal), n is the number of times interest compounds per year, and t is the time in years. For monthly compounding of $10,000 at 7% for 20 years: A = 10,000 × (1 + 0.07/12)^(12×20) = $40,552.
The Rule of 72 is a quick mental math shortcut to estimate how long it takes an investment to double. Divide 72 by the annual interest rate to get the approximate number of years. At 6% annual return: 72 ÷ 6 = 12 years to double. At 9%: 72 ÷ 9 = 8 years. At 12%: 72 ÷ 12 = 6 years. It works in reverse too: if you want your money to double in 10 years, you need roughly a 7.2% annual return.
APR (Annual Percentage Rate) is the simple annual interest rate without considering compounding. APY (Annual Percentage Yield) accounts for compounding and reflects the actual return you earn in a year. A savings account with a 5% APR compounding monthly has an APY of 5.12%. When comparing savings accounts or investments, always compare APY — it is the true yield.
More frequent compounding means slightly higher returns. On $10,000 at 8% for 10 years: annual compounding yields $21,589; quarterly compounding yields $21,911; monthly compounding yields $22,196; daily compounding yields $22,255. The difference between monthly and daily compounding is small, but the jump from annual to monthly compounding is meaningful over long periods.
Starting early dramatically amplifies compound interest because time is the most powerful variable in the formula. Consider two investors both earning 8%: Investor A invests $5,000/year from age 25–35 (10 years, $50,000 total) then stops. Investor B invests $5,000/year from age 35–65 (30 years, $150,000 total). At 65, Investor A has more money despite contributing three times less — purely because of the extra 10 years of compounding.
Yes. Compound interest is the reason credit card debt is so damaging. A $5,000 credit card balance at 24% APR, paid with minimum payments only, takes over 28 years to pay off and costs more than $7,000 in interest alone. The same compounding that builds wealth when you are the investor works against you when you are the borrower.
High-yield savings accounts (HYSA) currently offer 4.5%–5.5% APY (2024–2025), compounding daily or monthly. Money market accounts offer similar rates. For long-term wealth, index funds tracking the S&P 500 have historically returned 9%–10% annually (before inflation). Tax-advantaged accounts like 401(k)s and Roth IRAs shelter compound growth from taxes, making them the most powerful vehicles for long-term compounding.
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