Compound Interest Formula
The compound interest formula developed and used by mathematicians and investment experts is called the rule of 72.
They say to know how much your money will multiply in years. Just divide the interest rate by 72. For instance, if a 91 Day Treasury bill rate is say 10%, then 72/ 10= 7.2, seven years, two months to double. More explanation is made as we go deeper.
It is reported that when Albert Einstein was asked what was the most powerful thing in the world? He said it was compound interest.
“Because compound interest is a marvelous invention, Albert Einstein called it the 8th Wonder – It can work for you, or against you.
When you invest it works for you. When you borrow it works against you!” (greekshares.com)
“Albert Einstein also called compound interest “the greatest mathematical discovery of all time”
It is great and more acceptable when a great mathematician and genius like, Einstein acknowledges compound interest as the greatest mathematical discovery of all time.
Investment is ventured into to get returns. Most investment returns come in the form of compound gains.
When a farmer sows a seed of groundnut or peanut or maize and many more, he always reaps in multiples of what was sown. This is pure compounding.
It’s mostly exactly with many investment products and schemes. When one takes an investment policy, one has to wait patiently like the farmer.
The farmer would wait for days, months, and years by weeding, applying fertilizers, watering, and incurring labor and other costs to get the returns in multiples.
Farmers are arguably the greatest investors and again arguably the most emotionally intelligent investors.
Investors in all other areas mostly lack the spirit of the farmer, who would sow or plant, do everything necessary and wait for the results, good or bad.
Like the farmer, the investor has to constantly monitor his investments to see if he is making gains or losses.
He will take the necessary actions required as it is done in farming where the farmer prunes his plants and does other farming activities to keep his sown seeds or plants in check, so he could get a good harvest.
Compound interests is counting not by the normal order of 1, 2, 3, 4, 5, but counting by say, 1, 3, 5,7,15, 200, 3,000, 90,000, 400,000,000, 1,500,000,000,000,etc.
Investments grow by compounding when the interest earned is added to the principal amount and re-invested.
It would therefore be out of place to think that investments do not grow faster and for that is a waste of time and money to take an investment action.
The power of compound interest enriches you surprisingly with a matter of time.
You become rich once you have an investment plan and follow it and compound interest would compound your money for you.
The power of compound interest encourages you to invest even when you do not have enough.
You do not need to be a millionaire before you start investing.
Investing is not meant for those, who are already rich. Though they are the ones who invest. No wonder, they continue getting richer.
It is better to have an investment plan and follow it consistently with little amounts and compound interest would multiply them for you.
It is more than no plan but putting in a big amount once, stops, and waiting to get plenty in multitudes.
As indicated in the first paragraph mathematicians and investment experts have made the understanding of compound interest easier with what they call the rule of 72.
They say to know how much your money will multiply in years, just divide the interest rate by 72. For instance, if a 91 Day Treasury bill rate is say 12%, then 72/ 12= 6 years, six years to double.
If a mutual fund rate is say 41%, then 72/41= 1.76, one year, seven months, six days to double.
This simple calculation informs and advises you, where to invest and get more returns quickly.
The pay-back period (the time or period of getting back your investment with benefits) is easily determined by applying the 72 rule in investing.
Your investment would be doubled every six (6) years in the case of the Treasury bill and approximately every two (2) years in the case of a mutual fund, assuming the interest rates remain the same throughout the stated period used.
The higher the interest rates of the investments, the higher the returns from the investments. The shorter the pay-back period or the period the investments are recovered. The opposite is also true.
Readers should take note that I am not suggesting that mutual funds or unit trusts perform better than Treasury Bills or vice versa, they are used for purposes of illustrations.
©2021, Godwin-Xavier Ayeebo. All rights reserved.
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