The Art of Compounding By Mo2

Ah, one of my favorite themes. This will be a recurring topic but I figured I should get into some detail to give you a better idea as to how time actual is on our side once in a while. (Nice for a change eh?)

Compounding can work for you as long as we aren't talking about debt, which I'll get into another article. The most important figure you should remember is the number 72.

The Rule of 72
The number 72 is crucial so memorize it! To double your money invested you just need to think 72! Ok, Mo2 you dummy, you need 100% to double your money. Anyone knows that.

Well, quite true. However, if you compound your money you simply need to divide the term yield by 72. So say you have a 6% annual yield and you want to double your money. You simply need to divide 72 by 6 and you get 12 years. It's that simple! I used the word "term" because it doesn't have to be annual, if could bi-weekly, monthly, semi-annually, even a minute for that matter.

So when you're making your next investment just take a minute to think about how long it will take to double your money.

 

Monthly Compounding, Semi-Annual Compounding, and Annual Compounding
Ok now that I've shown you the rule of 72. The obvious thing here is that the more your money compounds the quicker you can double your money. Well, true but remember the yield has to be the same as the other compounding options. It could very well be that one investment may compound less but may have a higher yield rate.

The Rate of Return
I may be stating the obvious to some, but when there is rate of return for an investment, even if it is compounding monthly or bi-weekly the rate of return is usually an annual rate of return. This is the case for most investments unless stated otherwise. However, if the investment compounds more often than annually, then the Effective Rate of Return will actually be different from the rate given.

The Sound Investment
Now, just because something compounds a lot and has a decent yield doesn't mean it's a good investment! Always "know" what you're getting into. Never simply listen to your banker or financial planner just because he/she tells you it's a "sound" investment. You have to understand what you're investing in. Always take that extra step to educate yourself financially. It will definitely pay off in the longer run especially when you have to ask for advice to.

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If you would like to comment on this article or anything on this website, please feel free to e-mail Mo2. He can be reached at Mo2@Mo2Thinks.com. Thank you for visiting!