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What is compound interest?
Compounding interest is the interest you earn on both your initial investment plus the interest your investment has made. In short, compound interest makes your money grow faster. Your money grows faster because with time the amount of money you are being paid interest on gets bigger and bigger.
The power of compounding interest is time. The longer you leave an investment compounding the larger it will get. This growth is exponential, meaning it will have a faster growth rate on the back half of your investing timeline than on the front half. For example, say you make an initial investment of $100, it will take a shorter amount of time for your investment to go from $200 to $300 than for your initial $100 to go to $200.
An alternative to compounding interest is simple interest which only applies interest to your initial investment over the life of the investment.
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How long to double my investment?
The rule of 72:
The quickest way to figure out how long it will take your investment to double is to use “the rule of 72”. This is a quick and relatively accurate way of calculating how fast your investment will double at a certain interest rate.
To use the rule of 72, simply divide 72 by your interest rate, ex. 72/ i, the result is the number of years it will take to double your investment.
An example of this, say you believe you can obtain a rate of return (interest) of 10%, 72/10 = 7.2, it will take you 7.2 years to double your investment. What is a good interest rate for me to use? If you are invested in the stock market with a portfolio similar to the S&P 500 then you can expect to make an average return of 10-11% per year. This is the average return for the S&P 500 over many decades. That said, the stock market performs differently every year so one year might be low and another might be very high.
You can find more information on compound interest in our other articles: what is compound interest, and compound interest formula
Additional resources: Investor.gov