Home' LOTL : March 2007 Contents 19
that money is even more impressive than merely
saving your money. The key difference between
saving and investing is that when you invest, your
money works hard for you, whereas when you are
saving money, you’ve had to work hard to grow
THE MAGICAL COMPOUND
Investing can put you on the fast track to real
wealth due to the amazing effects of compound
interest (also known as compound earnings).
Compound interest is interest earned on interest.
Reinvesting the income you earn from your
investments is the key to rapidly accumulating
wealth. You will double your original investment in
five years when all returns are reinvested, and your
investment delivers a return of just over 14 per
cent each year. You will double your money in ten
years if your investment and reinvested earnings
deliver a 7 per cent return (see ‘The Rule of 72’).
If you’re making regular investments each year,
then the compounding keeps on happening
earnings upon earnings upon earnings. For
example, if Jill had her money in an investment
that paid 7 per cent each year she would now
have nearly $200,000 after ten years from her
original deposit of $100,000. If Jill had invested
$100,000 in an investment that delivered an after-
tax return of 15 per cent ten years ago, she would
have more than $400,000 today. If she reinvested
the $400,000 and earnings for another ten years
her investment would be worth more than $1.6
million. Investing is definitely better than doing
nothing with your money.
Getting started is the first step towards building
your future wealth. Remember, it’s never too late
to start investing.
DOUBLE YOUR MONEY: THE RULE OF 72
There is a handy rule of thumb, known as the rule of 72, which
gives you a timeframe for how quickly you can double your
investment by reinvesting your earnings.
Step 1: Start with the number ’72’.
Step 2: Decide what rate of return you expect to get from your
Step 3: Divide ‘72’ by your expected return.
Your answer equates to the number of years you will need to invest
in order to double your money.
For example, if you expect to receive a 5 per cent return each year
then you divide 72 by 5 (72 ÷ 5), which gives you 14.4 years. This
answer means you can double your money in just over 14 years
when you re-invest your earnings and your investment earns 5 per
cent each year. If however, you have your money sitting in a nil-
interest bank account, your investment will never grow.
Years (to double your money)
RULE OF 72
Annual return (%)
“The good news is that investing is
one of the most democratic and gay-
friendly activities in Australia.”
109 Fitzroy St, St Kilda
T. 03 9534 9041
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