COMPOUND INTEREST, RULE OF 72

If you want to know how much a lump sum grows over time with compound interest, you can simply double it and double it to get the answer instead of using fancy calculators, but how often will it double? If you know what the interest rate is then use 72 / rate.

Lump sum: £10,000
Interest rate: 7%
Answer: doubles every (72/7) 10 years

  1. So, in 40 years £10,000 would be worth £160,000 (10,000 x 2 x 2 x 2 x 2)
  2.  So, can you see why the rich will always be rich? THEY HAVE LUMP SUMS ALREADY and they double it every 10 years (depending on the rate).
  3. How many “doubles” do you have left? This is the most interesting question. Young people could potentially have (68 – 18) 50 years of doubling. So just a single lump sum of £10,000 doubled five times would be £320,000.
  4. With a rate of 10% the lump sum would double every (72/10) 7.2 years. So, in 50 years £10,000 would be £1.28 million.

Now you can see why you need a good initial lump sum in your ISA/pension!