FOUNDATIONS · STEP 4 OF 5
Your Money's Journey
Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it.
— Albert Einstein
Follow three Australians and see how time transforms money—for better or worse.
This Page Takes: 25 minutes
Why This Matters
Compound interest is the single most powerful force in building—or destroying—wealth. Understanding how it works determines whether you spend your life making money work for you, or working to pay interest to others.
The Magic Number: Rule of 72
Learn the one formula that predicts how money grows or debt multiplies.
72
Interest Rate (%)
Years to Double
How It Works
The Rule of 72 is mental math shortcut that tells you how long it takes for money to double at a given interest rate—whether that's investment growth or debt accumulation.
7% Return (ETFs)
72 ÷ 7 = 10.3 years
Your $50k investment doubles to $100k
20% Interest (Credit Card)
72 ÷ 20 = 3.6 years
Your $10k debt doubles to $20k
12% Loan (Car/Personal)
72 ÷ 12 = 6 years
Amount owed doubles without payments
Try It Yourself
Your money will double in
10.3
years
Quick Presets
Why 72?
Mathematically, the exact formula is: Years = ln(2) / ln(1 + rate) ≈ 69.3. But 72 is easier to work with because it divides evenly by many common interest rates (6, 8, 9, 12).
The Rule of 72 is accurate within 0.5 years for rates between 5% and 15%—perfect for quick mental estimates.
Meet Three Australians, Age 35
Same age, similar starting points, but very different money decisions. Let's follow their journeys over 10 years.
Sarah, 35
The Saver
"I keep my money safe in the bank. Can't lose what you don't risk."
Mike, 35
The Borrower
"I'll pay it off eventually. Just making minimum payments for now."
Emma, 35
The Investor
"I put my money to work early. Time in the market beats timing the market."
Sarah's Story: The Inflation Trap
When "safe" savings actually lose value
Savings Journey (with inflation impact)
Sarah's 10-Year Result
Nominal Balance
$52,578
+$2,578 gained ✓
Real Purchasing Power
$35,513
-$14,487 lost ✗
Real Return
-29%
over 10 years
What Happened: Sarah's bank balance grew slightly from interest, but inflation (averaging 4% per year) eroded her purchasing power faster than her savings grew. Her 0.5% return couldn't keep up with a 4% inflation rate.
In Real Terms: What cost $100 in Year 0 costs $148 in Year 10. Sarah's $52,578 can only buy what $35,513 could have bought when she started.
💭 "I thought I was being responsible by keeping my money 'safe,' but inflation ate my savings alive. I needed to earn MORE than 4% just to maintain purchasing power."
Mike's Story: Debt Compounding Against Him
When minimum payments keep you trapped for years
Debt Payoff Journey
Freedom achieved in Year 7! Total paid: $27,000
Mike's 7-Year Result (debt paid off)
Amount Borrowed
$15,000
Interest Paid
$11,127
Total Paid
$26,127
Time to Freedom
7 years
What Happened: By only making minimum payments, Mike paid almost 74% more than what he originally borrowed. At 22% interest, his debt would double in just 3.3 years (Rule of 72: 72÷22=3.3) if left unpaid.
The Trap: With each $375 payment, only a small portion went to principal in the early years. Most went to interest, keeping Mike trapped in debt for 7 years.
💭 "I paid almost DOUBLE what I originally borrowed. Compounding worked against me—22% means debt doubles every 3 years. Never again will I carry credit card debt."
The Minimum Payment Trap
Emma's Story: Compounding Working FOR Her
When patience and time create wealth
Investment Growth Journey
Rule of 72 in action: 72 ÷ 7% = 10.3 years to double. Right on track! 📈
Emma's 10-Year Result
Started With
$50,000
Grew To
$98,358
Wealth Gained
+$48,358
Return
+97%
What Happened: Emma invested in diversified ETFs (mix of Australian and international stocks) earning an average 7% return. Using the Rule of 72: 72÷7 = 10.3 years to double. Her money nearly doubled right on schedule.
The Magic: Emma did nothing special—no day trading, no get-rich-quick schemes. She invested, held through market ups and downs, and let compounding do the heavy lifting. Time in the market was the key.
💭 "I did nothing special—just invested and waited. Compounding did the heavy lifting. Ten years felt long at the start, but now I'm living off returns while Sarah and Mike are still struggling."
The Power of Starting Early
The 10-Year Outcome: Side-by-Side
Same age. Same time period. Vastly different results. The difference? Where compounding worked.
| Metric | 👤 Sarah The Saver | 👤 Mike The Borrower | 👤 Emma The Investor |
|---|---|---|---|
| Starting Position | $50,000 savings | -$15,000 debt | $50,000 invested |
| Interest Rate | 0.5% earned | 22% charged | 7% earned |
| Rule of 72 Prediction | Doubles in 144 years | Doubles in 3.3 years | Doubles in 10.3 years |
| After 10 Years (Nominal) | $52,578 | $0 (paid off year 7) | $98,358 |
| Real Value (inflation-adjusted) | $35,513 (71% purchasing power) | -$26,127 paid (74% more than borrowed) | $66,467 (beats inflation) |
| Net Outcome | LOST 29% | PAID 74% EXTRA | GAINED 33% REAL (97% nominal, 33% after inflation) |
🎯 The Compounding Decision
Every dollar you have faces three paths. The path you choose determines whether compounding works for you or against you.
GROW IT
Invest at 7%+ returns
→ Doubles every ~10 years
PAY WITH IT
Service debt at 20%+ interest
→ Doubles what you owe every 3.6 years
LOSE IT
Save at 0.5%, inflate at 4%
→ Loses 30%+ purchasing power in 10 years
Your Turn: Calculate Your Scenario
Which path are you on? Use the calculator below to see where your money is headed over time.
Investment Growth Calculator
See how your money grows with compound interest over time
Your Result
Final Balance
$20,097
You Contributed
$10,000
Interest Earned
$10,097
Rule of 72: Money doubles in
10.3 years
at 7% return
Foundations - Compound Interest: Complete
- The Rule of 72 predicts doubling time: 72 ÷ Interest Rate = Years to Double. It works for growth AND debt.
- Compound interest is neutral—it amplifies whatever direction your money is moving. Investments grow exponentially; debts spiral exponentially.
- Inflation (4%) beats low savings rates (0.5%), eroding purchasing power over time. You need returns above inflation to build real wealth.
- Time is the secret ingredient: Emma's 7% return nearly doubled her money in 10 years. Another 10 years doubles it again to $193k.
Homework
Are you more like Sarah (safe but losing to inflation), Mike (trapped in debt), or Emma (growing wealth)? What's one change you can make this week to shift toward Emma's path?
Use the calculator above to model YOUR current situation. If you have savings earning <2%, calculate how much purchasing power you're losing to inflation. If you have high-interest debt, calculate the total cost if you only make minimum payments. Write down one action you'll take this month to make compounding work FOR you, not against you.
What's Next?
20 minutes