**Intro**

I will also share an easy rule of thumb on how to calculate the doubling time of an investment at a specific interest rate. Also, make sure to stay tuned if you want to know how many days it takes to reach 1 million dollars if you start with one dollar and win money each day.

**Compound Interest Explained**

Compound interest, or interest on interest, is this almost magical thing that you need to use to get your investments to grow.

Whether you keep your money in a savings account, invest in stocks, or invest in any other way where you get interest returns on your investment, this is one of the most basic concepts that you need to understand when you invest to be able to make smart decisions for your finances and take control over your future.

As the time invested is the most important factor for the result, there’s a good reason why Einstein himself would recall compound interest as the 8th wonder of the world and one of the most powerful forces in the universe.

Compound interest lets your investments and savings grow by themselves while you sleep, eat, or watch YouTube videos. Yep, I know what you’re doing.

**Rule of 72**

To understand compound interest, first, you have to understand simple interest. Meet Kevin and Cindy, who are both 30 years old and want to invest during those 30 years for their pensions. Kevin has one thousand dollars to invest, and on this money, he will get a ten percent interest rate, equivalent to one hundred dollars every year.

Kevin withdraws the interest from the account but leaves the initial investment, the principal of one thousand dollars. After one year, Kevin gets 100 dollars of interest and now has $1100 in total. After the second year, he gets 100 interest again and has now got 1200 in total.

And you guessed it, after 3 years, the same thing happens again: he gets 100 percent interest, and he now has 1300 dollars. Yeah, I think he got it. After 30 years, Kevin has gotten 3000 dollars of interest, 100 each year. During those 30 years, and as he withdraws the interest every year, he doesn’t get any interest on interest or compound interest.

So, in total, he’s got four thousand dollars out of the thirty years. Now let’s see what happens to Cindy. She also invests one thousand dollars just as Kevin did, and just as he did. So, She also gets a 10-year interest rate on her investment each year, but instead of withdrawing the interest every year like Kevin did. Then She leaves the money invested and gets compound interest.

After one year, she gets a lot of interest, just like Kevin. When another year has passed, it’s time for the money to grow again. And here comes the interesting part after the second year, she doesn’t get 100 but 110. This is 10 percent of the money she accumulated after the first year, or $1100.

Thus, after two years, she now has one thousand two hundred and ten dollars. After the third year has passed, she gets interest again and again this year; she gets more interest than the last year. After the third year, she gets ten percent of 1210, which is 121, and now she has 1301 dollars in total, and so on.

As time passes, earning interest increases each year, as in the second year, Cindy is not only interested in her initial investment of a thousand dollars but also in the interest earned in previous years. The interest is compounding in this figure. I visualized the growth of Kevin and saw these investments.

The red line shows Kevin’s growth without compound interest. Cindy’s investment grows exponentially, as the purple line shows. The more interest her investment generates, the faster it grows. And here time is your best friend. You can see this clearly by looking at how fast a thousand dollars is earned.

After about nine years, the first one thousand dollars has doubled to over two thousand, then it goes faster. And it takes only four additional years for the investment to grow to three thousand. After that, four thousand is reached in less than three years, and it grows faster and faster than more wealth has accumulated.

Kevin does not get the same snowball effect as his money grows linearly. It takes the same amount of time to grow his investment from 1000 to 2000 as it does from 2000 to 3000, and so on. A rule of thumb that you can use to quickly calculate the doubling time of an investment at a specific interest rate is the rule of 72 or the 72 rule.

The rule of 72 says that you can obtain the doubling time of an investment by dividing 72 by the interest rate in percentage. If you expect an interest rate of 1, which is equivalent to the interest rate of many savings accounts these days. Then it will take you 72 divided by 1, which is equal to 72 years to double your money. This is without taking any taxation into account.

In reality, at this rate, you will end up losing money due to inflation. This is higher than one percent, and your money will lose buying power at a rate of two percent, which is equal to inflation nowadays. It will take 36 years for the investment to double, and with 10 interest rates equal to the stock market yearly returns, it takes 7.2 years.

So to not lose money to inflation, you have to invest it with a higher interest rate. To understand how powerful compound interest is, imagine that you start with one dollar and then double the money each day. On the second day, you will have two dollars. So, on the third day, you will have four dollars. And the fourth, eight dollars, and so on.

Do you know how long it will take to get to one million dollars? 21 days. Now, it’s far from realistic to think that you can double your money every day. If you don’t go to a casino and have an immense amount of luck. But this shows how powerful compound interest is.

The amount of money that you can accumulate depends on the interest rate, the principal, and the time invested. The money will naturally grow faster with a higher interest rate. But remember that a higher interest rate usually also means a higher risk for your investments. The principal or initial investment is also important, but not as important as time.

Let’s take a look. If you don’t have as much investment time as Cindy did but you want to reach the same amount. In the end, then you have to start with a higher principle.

If you invest for 20 years instead of 30, then you need an initial investment of 2600, or 2.6 times more, to reach the same result. And if your investment horizon is only 10 years. You need a principle as high as 6,700, or 6.7 times more, to get the same result.

So if you’re young, then time is on your side, and it can be worth investing even smaller amounts. If you’re a bit older when you start investing, then. If possible, it would be worth trying to invest higher amounts. But even small amounts will of course be able to grow with compound interest and make a difference in the end.

**Savings vs. Immediate Reward**

It’s interesting to consider how much immediate consumption would be worth in the future. If you had invested the money instead. A coffee on the go for about $5 would be equal to $80 in 30 years invested with a 10 percent interest rate and compound interest.

Ordering lunch for around 10 would, in the same way, be worth almost 160 dollars with compound interest. Now, I’m not saying that you should never buy coffee or lunch, but it’s good to be aware. So you can make smart economic decisions and have control over your consumption and investment.

Often, we just don’t get one coffee, but maybe we get one coffee a week. In one year, this will be 260, and maybe this is not so much for you in one year. But after 30 years invested with compound interest.

This could be four thousand one hundred dollars instead, and that lunch could. In the same way, be eight thousand two hundred dollars. Is it still worth it? Honestly, this is more than I expected.

**Fund Fees**

Another example of when compound interest has an effect is when looking at the management fees of funds. It’s easy to be fooled into thinking that a management fee of 0.2 percent or 2 percent does not matter that much.