Compounding Rules of 72, 115 and 144 (2024)

Compounding fallacy: The rules of 72, 115 and 144 assume that the interest will be reinvested and compounded at the original rate. This is the case when you invest in a CD with the interest accumulating or a zero coupon or discounted bond. However, when you invest in a CD, bond or stock that is paying the interest or dividend annually, that payment would have to be reinvested at the original rate in order to reach the targeted goal as planned. This is unlikely for a number of reasons, one of which is that short term rates are usually lower than long term rates. When you originally invested, you received a rate for a term that is longer than the remaining term will be for the interest payments. Unless market rates have increased, or you found a different way to invest with greater returns, you are not likelyto get the same rate as the original rate of the investment. Further, taxes can be a factor in diminishing the amount that you can reinvest. However, using these rules will give you a way of estimating the final amounts and a basis of comparing one investment to another.