Why compounding returns on investments will make you rich Leave a comment

Compound returns on investment are the key to becoming rich. In an investment that compounds, returns earn compound interest. Let’s look at the following example. Assume that one has an investment that earns compound returns on a $100.00 investment at 10%. In the second year that $100.00 investment would earn $10.00 in interest. In year 2, the $100 investment would once again earn $10.00. But in year three, in addition to the earnings on the $100.00, the $10.00 of earn a return would also earn $1.00. So, the investor would have $111. This is what is talked about when one says, let your money work for you. Compounding returns is the key to becoming rich.

A very simple formula that can be used to determine how long would it take for your money to double, is to use the rule of 72. The rule of 72 says that if you divide 72 by the expected return, it will tell you how many years it will take for your money to double. In the above example, the returns were 10%. 72/10 would mean that every 7.2 years the investor’s money would double. And if more money is added to the investment, that too would double in 7.2 years if the return stayed constant. It is easy to see how compounding is the key to becoming rich.