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Finance6 min read

The power of the compound: 72 laws to estimate the time when wealth doubles

It's not hysteria, but the law of 72 makes you count how many years it takes to double the principal under any annualized gain.

The compound interest means `interest is also interest', and the long-term insistence will result in an exponential increase. A simple estimation tool is rule 72: the number of years required to double the principal amount by dividing it by the percentage of annualized return. For example, the annualization rate is six percent, 72 percent, divided by six percent, equals 12 years, and eight percent is about nine years. This law is very practical in planning old-age and child education benefits.

Sets how to magnify the compound effect

  • Fixed-term inputs, smoothing market fluctuations, low and high
  • Time is the best friend of the compound. The sooner the better.
  • Set the dividends and interest as automatic reinvestments, and don't let the proceeds lie on the books.
  • For each point of reduction, the final amount will be significantly increased over the long term

The negative side of the compound interest is "negative co-benefits": high fees, frequent trading and inflation erode the principal. Many ignore the rate and, in fact, one per cent of the annual management fee eats nearly a quarter of the final gain on a 30-year scale. To understand asset allocation in a systematic manner, reference can be made to the investment logic in [the Introduction to Retributive Investments] (/compund-interest-investing) and to avoid hidden costs of cross-border investments in combination with [currency-exchange-exchange-tips].

The pitfall of compoundity is the "linear intuition" — the human brain is accustomed to linear thinking, which tends to seriously underestimate the exponential growth of more than 20 years.

Minimum action from today.

We don't have to wait for enough money to invest. A fixed 10 per cent of income per month is invested in an index fund, which lasts for 20 years and is expected to complete most of your work. Returning to the overall framework of financial planning, it is proposed to read the [establishment of contingency fund] (/build-emergency-fund) to ensure that the basic security cushion is in place before increasing the proportion of investments.