What is compound interest? What is the rule of 72?
Video Transcript:
0:01 Hey everyone, this is Phil with Foundation Wealth Planning. Thank you for joining me. Got a topic today that I think is going to be really exciting.
0:10 It's about compound interest in the Rule of 72. So I did a video the other day that I posted on my website and online.
0:21 I think you should all take a look at it. It's a little bit more of a complex topic though about how to determine a Roth vs Traditional IRA.
0:27 I'm going to go to some of the basics and one of the most basic but yet most powerful investing concept is compound interest.
0:37 So I wanted to go through that and help. Maybe drive that home as to why that's so important and encourage you to get started as soon as you can.
0:46 So there's a classic question out there you may have heard it asked, Would you rather have a penny that doubles every day for 30 days or would you rather have one million dollars?
1:00 That's a pretty difficult question. Most people would probably save a million dollars. However, if you said that you'd rather have a million dollars,
1:07 you would be wrong. So the million dollars is great, but the penny that doubles every day for 30 days turns into 5.3 million dollars.
1:21 Yeah, so that's the power of compound interest and the idea of compound interest is You have some money it grows and get some interest and then when you combine that interest with your original principle in which you put in originally that starts to get interest so your interest starts to earn interest
1:40 so the example would be if you want to just run through some numbers right if you have a hundred dollars and that earns a 10% interest/return/growth whatever you want to say well that a hundred dollars is going to earn ten dollars right? if you earn 10%. okay well the next year you
2:01 get to now take the 10% on the $110 so you have the hundred plus ten so now the 10% instead of earning ten dollars earn eleven dollars, right? then the return from last year starts to earn some money and that goes on and so forth for as many years as you're able to keep investing and that's when it starts
2:24 to become really powerful many years down the line but eventually, you're going to get to the point where you've got more money in there in growth than what you put in yourself so I say that to say get started as soon as you can that's so if we talk about the rule of 72 you might give you a guideline
2:45 as to how this works in real life so if you want a quick way to say well how long is it going to take my money to double right because in the penny example of doubling every day which is unrealistic in the real world, it's going to take a lot longer than that so if you take 72 and you divide it by your
3:06 anticipated interest rate or rate of return that will give you the approximate number of years as to how long it will take to double so if you have 72 and say you think you're going to get 7.2 percent rate of return we'll make that easy.
3:23 Go ahead and divide 72 by 7.2 gives you 10 years. So every 10 years your money would double at a 7.2 percent interest rate.
3:30 The flip side of that the other easy math would be if you did a 10 percent rate of return. so 72
3:35 divided by 10 percent would say it would double every 7.2 years right?
So if you got a 7.2 percent rate of return let's go with the first example and your money's gonna
3:48 double every 10 years and let's just say you were a super saver and you got together a hundred thousand dollars in your account
3:56 by the age of 30 and then you never added any money to it but you got 7.2 percent rate of return.
4:02 Double every 10 years. Well let's look at what that looks at on a compound interest with just that $100,000 and not adding any more to it.
4:10 Right, $100,000 at age 30 would turn into $200,000 at age 40. $400,000 at age 50. $800,000 at age 60. $1.6 million at age 70.
4:27 Right, and that's without adding any money from age 30. So, the compounding from when you're young really pays when you're older.
4:40 So, I encourage you. Talk to a financial advisor. Get yourself on a plan. Start saving as soon as you can and investing as soon as you can.
4:51 Make sure you're working on getting out of your consumer debt. Get a good financial foundation with your emergency fund. Get an emergency fund and get invested.
4:59 So if you have any questions, please reach out. We'd love to help you. Again, it's Phil with Foundation Wealth Planning.
5:05 I'm a CERTIFIED FINANCIAL PLANNER™ and, you know, helping people achieve their, financial goals and using a biblical finance basis along the way.
5:13 So I look forward to helping you. Have a great day. Thank you.
Phil Francois CFP®
Foundation Wealth Planning
https://www.foundationwealthplanning.com/
phil@foundationwealthplanning.com