Investment Strategies

Power of Compounding

Power of compounding is a simple concept that means the longer and the more you invest, the higher the potential reward on your money, since your money compounds over time. Compounding is a process that allows interest to earn interest upon itself.

For example, if you start with $1 and you receive 100% interest every day, you will have $2 the next day, and $4 the day after and so on. In about 21 days you will have $1 million. No wonder compounding is such an awesome strategy. Of course, your money won’t double every day even with compound interest, but here is a rule that can help you easily figure out how long it will take to double your money.

Rule of 72: Take the numbers seventy-two and divide it by the percent of interest or rate of return of your investment to find how long it will take to double your money.

For example, if you invest in stocks, historically, your rate of return would be 11%. This means if you stay in the market for the long run, your money will double every 6½ years: 72 ÷ 11 = 6.5.

Kids, time is on your side, so start now. Go to the financial goals calculator to determine when you will achieve your goals. Of course, this calculator will also help you map the strategies for your investments goals.