Understanding Compounding Effects of Your Return Of Investment
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Understanding The Compounding Effects of Your Return of Investment. The Rule of 72. It is a well known rule and has been used a lot by those in the profession of Financial Planner or Insurance Advisor. The Rule of 72 is simply a way to calculate how long does it take for you to double your money in terms of the no of years depending on the return you are getting. For Example: In Japan the interest rate the bank are so low that it is almost 0%. Let's say if interest rate is 0.1 %,
72/0.1= 720. So it will take you 720 years to double your money with that kind of return. If for some reason you are able to get an investment where it can give you a consistent return of 10% per year, It will take you 72/10=7.2 years to double your money. Did you see the importance of this no. The thing is that most people get it wrong, the return you are getting should be calculated after subtracting the inflation rate. Rule of compounding can have a reverse impact when the interest rate was charged against you. Instead of growing your money, it give an explosive shrinking of your Money. For example: If you borrow money from Bank at the rate of 10%, in 7.2 years you actually owed the bank twice as much as the original amount.
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