Some of you may know the Rule of 72 (or 70): If you have money compounding interest at R% per year, it doubles in value after roughly 72/R years (for single-digit R). A handy rule for assessing how much you can expect of your investments/loans.
Some of you may know the Rule of 72 (or 70): If you have money compounding interest at R% per year, it doubles in value after roughly 72/R years (for single-digit R). A handy rule for assessing how much you can expect of your investments/loans.
But there's also a Rule of 125: If you pay in a fixed amount of money into something that compounds at R% per year, it doubles in total value after roughly 125/R years (again, for small R). Handy for assessing long-running regular-deposit savings plans.
But there's also a Rule of 125: If you pay in a fixed amount of money into something that compounds at R% per year, it doubles in total value after roughly 125/R years (again, for small R). Handy for assessing long-running regular-deposit savings plans.
No, I'm counting how long till the compounded interest doubles the value of what you've put in total. Since more money keeps coming in that won't have generated as much compound interest, the doubling takes longer.
ReplyDeleteWhile it's obvious that putting in all the money at the beginning gives you a better return, most people can't afford that, but can put in smaller amounts regularly.
The first one is simple: X invested at N% = 2X after 72/N years.
ReplyDeleteWhat Lars means by the second is this:
X invested every year for Y years = XY total investment.
At N% return, your total account value = 2XY when Y = 125/N.
For example, $1000 plunked into a CD at 5% will be worth $2000 after about 14 years.
$1000 invested every year into an IRA at 5% will be worth $50k in 25 years, with $25k invested.
I wasn't sure of this myself, so I made a spreadsheet to model it.
Er, yeah. What Lars said.
I really need to learn to explain myself better.
ReplyDelete