Creating wealth is a super compound: Rule of 72

Investing can put you on the fast track to real wealth due to the amazing effects of compound interest, which is also known as compound earnings. Compound interest is earnings on any earnings that you have reinvested.

Reinvesting the income you earn from your investments is the key to rapidly accumulating wealth. You will double your original investment in five years when all returns are reinvested, and your investment returns around 14.5% each year. You will double your money in 10 years if your investment and reinvested earnings deliver a 7% return. If you’re making regular investments each year, then the compounding keeps on happening — earnings upon earnings upon earnings.

Your super account also benefits from this wealth-creating tool, because you cannot take your money out until you retire which means that your super account accumulates fund earnings, which are then re-invested and deliver more earnings — earnings on earnings from your account’s earnings.

The more money you invest the more dramatic are the effects of compound interest. If you invest $100,000 in an investment that pays 7% a year, then you would have nearly $200,000 after 10 years from your original deposit of $100,000. If you had invested $100,000 in an investment that delivered a return of around 14% you would have nearly $400,000 today. If you make regular contributions to that investment, then your super balance could be even bigger.

Investment trick: The rule of 72

Even the investment world uses ‘rule of thumb’ principles. There is a handy rule of thumb, known as the rule of 72, which gives you a timeframe for how quickly you can double your investment by re-investing your earnings.

Step 1: You start with the number ’72’.

Step 2: You decide what rate of return you expect to get from your investment

Step 3: Divide the return into the number ‘72’.

Your answer is: the number of years for which you will need to invest in order to double your money.

For example, if you expect to receive a 5% return each year (such as interest on a term deposit), then you divide 5 into 72 (72 ÷ 5), which gives you 14.4 years. This answer means you can double your money in just over 14.4 years when you re-invest your earnings and your investment earns 5 % each year.

If your investment earns 15%, you double your money in less than five years. If however, you have your money sitting in a bank account that pays no interest, your investment will never grow.

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