Compounding Your Money (Hopefully an exam question)

Q1 (Basic). Tom (age 30) invests $1 Million into a fund which guarantees an annual return of 7.2% per year. How much will Tom have at age 50 (twenty years from now)?

1. $2 Million
2. $4 Million
3. $6 Million

Answer (2). Using the rule of 72, an investment of 7.2% per year means Tom's money will double every ten years (72/7.2=10 years). Hence Tom's money would have doubled twice over 20 years. 1 x 2 x 2= 4

Q2 (Basic). Tom, now age 50, decides to continue investing his $4 million into the same fund which guarantees an annual return of 7.2% per year. How much will Tom have at age 70 (twenty years later)?

1. $8 Million
2. $12 Million
3. $16 Million

Answer (3). Using the same rule of 72, an investment of 7.2% per year means Tom's fund will double every ten years. Hence 4 x 2 x 2= 16

Q3 (Intermediate). How much more did Tom's money grow between the age of 50 to 70 than when he was between the age of 30 to 50?

1. $8 Million
2. $9 Million
3. $10 Million

Answer (2). Age 30 to 50, Tom's investment grew by $3 Million. At age 50 to 70, Tom's investment grew by $12 Million. Hence $12mil - $3Mil = $9 Mil.

Q4 (Advanced). What did you learn?

Answer: Compounding and Time factor makes hell lots of a difference in wealth accumulation. Start young.