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If you want to maximize your retirement nest egg, it's important to understand how compound interest and "the rule of 72" affect your investments.

The rule of 72 is a mathematical formula that calculates approximately how long it would take your money to double, by dividing the interest rate you're earning into the number 72. The number that results from doing that is the number of years it takes for your money to double.

For instance, if you were able to earn a 6 percent annual average rate of return on an investment, you would divide 72 by 6, which would give you 12. That means that if left alone, your money should double in approximately 12 years. In 36 years, your money would double three times: If your original amount was $1,000, it would become $2,000 in 12 years. Then the $2,000 would double to $4,000 in 24 years. Eventually that $4,000 would double to $8,000 in year 36.

If you think that's a lot, imagine if I could make 12 percent for those 36 years. That would cause the money to double every 6 years (72 divided by 12). If you work through the numbers you will see that the total in 36 years would be $64,000 instead of the $8,000 you got at 6 percent. Wow! Doubling the interest in this example would mean making eight times the money.

If you have some time on your hands, work through the example using an 18 percent return. (The money would double every 4 years.) Just be sure to sit down when you do the math.

As you can see, the difference of a few percentage points over a lifetime can result in thousands of dollars of additional money for your nest egg.

For more free information about the Rule of 72 and other retirement planning strategies, please visit Dave Schloss' blog at YourInvestmentAdvice.com

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