Understanding the Magic of Compounding
Albert Einstein supposedly called compound interest the eighth wonder of the world. One of the simplest ways to understand compounding is the “Rule of 72”. By dividing 72 by your expected annual rate of return, you can quickly estimate how many years it will take for your investment to double.
For instance, if your mutual fund portfolio yields an average of 12% per year, your money will double in exactly 6 years (72 ÷ 12 = 6).
Why This Matters for Goal-Based Planning
When you are planning for a child’s education that is 12 years away, knowing that your money can double twice in that timeframe (at 12% return) dramatically changes how much you need to invest today.