The Rule of 72

The rule of 72 tells you how many years it takes to double your money. 9% a year would have you double your money in 8 years (72/.09=8 years). $100 turns into $200 in 8 years at 9% and then $400 in 8 more years. At 5%, good CD rate today, you would double your money in 14.4 years (72/.05=14.4 years). $100 turns into $200 in 14.4 years. Compare that to the same$100 turning into $400 in 16 years at 9%.

People think in terms of an annual return of 5% or 9%. Why? Why not a week or month or two? It’s the percentage return that is divided into 72 not the amount of time. If you think of a year as a cycle, The compound interest table shows how money grows by cycle. Looking at the 5 year line now becomes 5 cycles. It’s possible to have 5 cycles in 1 year. 6% 3 times, or cycles, a year equals 18% in 1 year. $100 doubles to $200 in 4 years and $400 in 4 more years. Shorter time in a cycle than one 1 year can generate money faster. It takes more work but you get paid a nice income for it.

If compounding your money is your priority, you need to be more active than owning CDs. You need to take reasonable risks for reasonable returns. Even CDs have the risk of inflation and outliving the income they return. A reasonable strategy is profitably trading stocks to get a combination of dividend income and capital gains.

Buying stocks that frequently raise their dividends, 6 years out of the last 10, just before the ex-dividend date or when their stock price is low (as can be seen of Yahoo finance or Stockcharts.com) is reasonable risk way to compound your money. They don’t go down as much as most stocks and when you have a profit, you can sell it. When it pay a dividend, you get another source of income while you wait for it to go up. This is an example of an area to work to get more income.