AppleTreesandExperience 101That is $2 trillion—base don a quite mo dest 4% rate of return.
Not only nothing to sneeze at but something to be joyous over. Buf-
fett calle dthis vignette “The Joys of Compoun ding.”
It explains the apocryphal story of Buffett riding up a crowded
office building elevator. All heads were staring up at the floor num-
bers lighting across the top, while Buffett was scouring the elevator
floor. As he walke dout, Buffett stoope d down an dpicke dup a penny
lying on the floor. The doors close dbehin dhim, smirks crosse dsome
passengers’ faces, and one rider remarked, “That is the start of the
next billion.”
If you think a penny today does not amount to a hill of beans,
consider how much it will grow to over time! That is the joy of future
values of money—they get higher the more compounding there is.
You get compounding in two ways. You can put money away earlier
rather than later, and you can get returns (interest or dividends) paid
more frequently an dreinvest them too. That is why buil ding wealth
calls for saving early an doften, though investing only when the price
is right.
Investors grasp the joys of compounding, for it is a useful tool
to evaluate competing opportunities quickly. A handy reference for
making the comparisons gauges how long it takes a given amount of
money to double at varying compounded rates of return (or interest
rates).
Calle dtherule of 72s, it says that dividing 72 by the rate of
return gives the approximate number of years it takes for an amount
of money to double. For example, an investment yielding a com-
pounded rate of return of 9% will double in about eight years (72
divided by 9 equals 8) and one yielding 6% will double in about 12
years (72 divided by 6 equals 12).
The rule of 72s can show all sorts of variations on the relation-
ship between money in han dnow an dmoney to be gotten in the
future. For example, it can determine what required rate of return
is necessary for a certain sum to grow to a desired sum in the future.
Or if you know what rate of return is available or possible, it can
figure how much money someone needs today in order for it to grow
to a desired level at some future time.
Take an example. If the available average rate of return on money
from now until 40 years from now is 9%, how much money does a
25-year-old person need today in order to retire as a millionaire at
age 65 without saving another cent over that time? Work backward
from ending up with $1,000,000 at age 65. Since money earning a