We will introduce you to the rural method of easily calculating compound interest.
The advantage of the numerical operation is that you do not need to know compound interest.
In order to roughly calculate the investment return using compound interest, you do not need to know the formula for calculating compound interest. All you need to do is know rule 72, take inflation into account, and know what investment products can overcome inflation over time. These are mostly shares or equity mutual funds.
Rule 72 means that if you divide the potential return by this number, you will find out how long the value of the investment will double. For example, if you have an interest rate of five percent a year, then by dividing 72/5, you will find that the investment will double in about 14 years and several months.
Before you start by calculating how long your initial investment will double, keep in mind that you should take inflation into account in the calculation. However, you can easily get around this by subtracting inflation from the interest rate. Suppose the average annual return on shareholdings is eight percent, but inflation averages three percent. the adjusted yield from inflation will thus be five percentage points.
How to calculate yield
To simplify the already simple method, we take into account a one-time deposit. Suppose you invest one hundred thousand crowns this year. The inflation-adjusted annual return will be five percent. Your investment horizon will be three decades long. According to the above calculations, you will double your deposit, ie the amount of CZK 200,000 in 15 years. In 30 years, you will have four hundred times this year. Please note that this is an indicative yield only.
Even if it is not a regular method of calculating compound interest, which is used for long investment horizons, you can quickly calculate, for example in a tram, how long your investment will double. If you want to find out how high a return you get, for example when saving or investing in retirement, you can’t do without knowledge of high school mathematics.