Download Compound Interest And The Rule Of 72

As Christians, we are called to be good stewards of God’s resources. A steward can be
described as someone who manages the resources of another. “The earth is the Lord’s
and all that is in it, the world and those who dwell therein”—Psalms 24:1 (The New
English Bible). To effectively manage God’s financial resources, it helps to have some
understanding of modern day financial concepts, strategies, and mathematical formulas.
Compound interest is a great ally in catapulting you toward achieving your financial
goals. Through an understanding of compound interest, God can pour out a blessing upon
you, which you will not be able to measure! Albert Einstein once called compound
interest “the world’s most impressive invention” and dubbed it the “eighth wonder of the
world.”1 Compound interest means all the money you’ve invested earns interest and then
the combined amount of the original investments plus your interest earns more interest.
Compounding means interest added to interest. Compound interest does not produce
linear growth like the pattern 1, 2, 3, 4, 5, 6, and so on; it produces geometric growth
through compounding like the pattern 1, 2, 4, 8, 16, 32, and so on. Usually, the more
frequently your money compounds when earning interest, the better. For example, daily
compounding is normally better than monthly compounding, which is better than
quarterly compounding, which is better than yearly compounding.
A basic formula for compound interest is as follows:
FV = ID (1 + R)T, then FV – ID
Where:
FV = Future Value
ID = Initial Deposit
R = Rate (interest rate earned)
T = Time (number of years invested)
Assuming the following investment--$10,000 Initial Deposit, 6% interest Rate, 5-year
Time period, the math would work as follows:
Year
Year 1
Year 2
Year 3
Year 4
Year 5
FV = $10,000.00 x (1 + 0.06)5
Formula Results By Year
$10,000. 00 x (1 + 0.06)1 = $10,600.00
$10,600. 00 x (1 + 0.06)2 = $11,236.00
$11,236. 00 x (1 + 0.06)3 = $11,910.16
$11,910. 16 x (1 + 0.06)4 = $12,624.77
$12,624. 77 x (1 + 0.06)5 = $13,382.26
Then
FV – ID = $13,382.26 - $10,000.00 = $3,382.26
Total Initial Deposit Plus
Interest
$10,600.00
$11,236.00
$11,910.16
$12,624.77
$13,382.26
Total Interest Earned
$3,382.26
The effect of the individual parts of the formula in combination with each other produces
synergistic results in the outcome that are greater than the sum of its parts individually. In
other words, small increases in any of the components can have a dramatic incremental
effect on the total compound interest earned.
1
Laurie Goering, Making do with less may secure finances, Chicago Tribune, January 1994.
Another useful tool in approximating the magic of compounding is the “Rule of 72.”
Albert Einstein is credited with discovering the compound interest Rule of 72 and said,
“It is the greatest mathematical discovery of all time.” The Rule of 72 is a mathematical
way of approximating the number of years it takes an investment to double in value. You
estimate the number of years for an investment to double by dividing 72 by the annual
rate of return. For example, if you expect to earn a 10% return on your $10,000
investment, then 72 divided by 10 = 7.2 years for your investment to double in value to
$20,000. Conversely, if you expect your $10,000 investment to double in 7.2 years and
you want to know the interest rate needed, you simply take 72 divided by 7.2 = 10%
interest. You can even use it to compare stock market interest rate returns to other
investments. For example, assume you are looking at lots with a real estate agent. The
agent tells you the properties have doubled in value during the last 14 years. You could
get a quick estimate of the increase per year in value by doing the following math: 72
divided by 14 = 5.14% per year.
There is one formula that is infinitely more important than even the “Rule of 72”:
“1” cross + “3” nails = “4” given.
Praise God!
This article is adapted from Making Money Work: A Christian Guide For Personal
Finance with permission of Willie Glenn Page, Inc.  2005.
Making Money Work strives to provide the absolute finest in Christian personal finance
education. “Making Money Work: A Christian Guide For Personal Finance” is a book
based on Biblical principles that comes with a CD-ROM that has over 90 financial
calculators. In addition, we have a CD-RW workbook for people who would like to use
Making Money Work as a personal finance course. Please visit our website at
http://www.makingmoneywork.us/.