Investors who master the powerful principles of exponential and compound growth will be more successful in meeting their goals than those who don’t.
Double Time and the Rule of 72 are key concepts in understanding and making quick estimations of the benefits of exponential and compound growth.
Double Time
Double Time is the number of time periods it takes exponential or compound growth to double an amount. Time periods may be any measurement such as seconds, hours, days, months, or years. The amount measured could be anything that is growing at a constant rate such as the population, bacteria in a lab, or money.
Rule of 72
The Rule of 72 is a helpful concept to estimate doubling time. In order to approximate the number of years it takes to double an investment, divide the growth rate into 72. For example, if an amount is growing by 10% per period, it will take approximately 7.2 periods (72 divided by 10 = 7.2) to double.
Double Time and Rule of 72 to Estimate Exponential Growth
In investment management and planning, double time and the rule of 72 are valuable tools. If an investment is earning 8% per year it will take approximately 9 years to double (72 divided by 8 = 9). This means a $100,000 investment at age 20 would become $3.2 million at age 65 without adding any additional capital. Forty-five years allows the $100,000 to double 5 times (every 9 years). This means a $100,000 investment at age 20 would become $3.2 million at age 65. This illustrates the power of exponential and compound growth and importance of time.
| AAAMP Blog by Ken Faulkenberry | |
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Ken Faulkenberry earned an MBA from the University of Southern California (USC) Marshall School of Business with an emphasis in investments. Ken has 25 years of investment experience and is dedicated to helping people with self-directed investment management through the Arbor Investment Planner. His asset allocation strategies have an outstanding performance record. |
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