Albert Einstein once said “The most powerful force in the universe is compound interest”. Is it really true? How powerful is it? Let’s find out.

First of all, have you ever heard about “Rule 72”? According to Investopedia.com, Rule 72 is:

A rule stating that in order to find the number of years required to double your money at a given interest rate, you divide the compound return into 72. The result is the approximate number of years that it will take for your investment to double.

How does it work?

• If we put our money in an investment vehicle that generates 6% interest every year, we will double our money in 12 years (= 72 / 6).
• If we are able to find an investment vehicle that generates 12% interest a year, then we will double our money in 6 years (= 72 / 12).

Now, we imagine we have $60,000 today. How long will it take to reach $1,000,000? Let’s use Rule 72 to find out. First, we need to double $60,000 to $120,000. Then, we need to double it from $120,000 to $240,000; then to $480,000 and finally to $960,000 –> which is close to $1 million. Basically, we need to “double” our money 4 times.

• Interest of 3%: we need about 96 years
• Interest of 6%: we need about 48 years
• Interest of 8%: we need about 36 years
• Interest of 12%: we need about 24 years
• Interest of 20%: we need about 14.4 years

Note that all the calculations above are approximation. Rule 72 is also an approximation tool that allow us to calculate compound interest easily.

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