The Rule of 72 - Double Your Money
Albert Einstein (1879 - 1955) called compound interest "the 8th wonder of the world".
Here is an easy rule you can use to work out how your savings or investments can grow with compound interest.
It is called the Rule of 72.
The rule of 72 is a rule of thumb that provides approximations but it is surprisingly accurate.
It is a quick and simple technique for estimating one of two things: 1.
The time it takes for a single amount of money to double with a known interest rate.
2.
The rate of return you need to earn for an amount to double within a known time period.
Here's how it works: Divide the interest rate (or average annual return) into 72.
The result tells you how long it will take for your money to double without further savings.
If, for example, you have $10 000 earning a constant rate of 6% interest (after tax) you would divide 72 by 6 = 12.
This means every 12 years your $10,000 will double, so: After 12 years you have $20,000 After 24 years you have $40,000 If you want to find out what rate of interest you will need to earn to double your money in say five years you would then divide 72 by the number of years being 5.
This gives an answer of 14.
4 so it would need to achieve a rate of return after tax of 14.
4%.
Using the rule of 72 is easier to remember than using equations and is therefore more user friendly for those who are not financially inclined.
The rule of 72 works in reverse too and tells us how long it takes for our debts to double.
If you owe $10,000 on your credit card at 18% interest and you don't pay it off, your debt will double in around 4 years.
It's a frightening thought and a real incentive to pay off that high interest debt.
The rule of 72 also can help us understand inflation.
By using a 4% yearly inflation and the rule of 72 we can see that this means that average prices double in 18 years (72 divided by 4 equals 18).
When you hear older people talk about the "good old days" and low prices they meant it.
However incomes also tended to be lower in the past.
Benjamin Franklin said, "Time is Money" and now you know just what he meant.
Obviously, in the real world you are unlikely to have a constant interest rate unless your investment is in a long-term fixed income instrument.
This rule is purely a tool to help illustrate the impact that time and rate of return has on your money without the consideration of taxes and inflation.
Use the rule of 72 to marvel at the magic of compound interest, use it to avoid doubling your debt and use it to understand inflation.
Here is an easy rule you can use to work out how your savings or investments can grow with compound interest.
It is called the Rule of 72.
The rule of 72 is a rule of thumb that provides approximations but it is surprisingly accurate.
It is a quick and simple technique for estimating one of two things: 1.
The time it takes for a single amount of money to double with a known interest rate.
2.
The rate of return you need to earn for an amount to double within a known time period.
Here's how it works: Divide the interest rate (or average annual return) into 72.
The result tells you how long it will take for your money to double without further savings.
If, for example, you have $10 000 earning a constant rate of 6% interest (after tax) you would divide 72 by 6 = 12.
This means every 12 years your $10,000 will double, so: After 12 years you have $20,000 After 24 years you have $40,000 If you want to find out what rate of interest you will need to earn to double your money in say five years you would then divide 72 by the number of years being 5.
This gives an answer of 14.
4 so it would need to achieve a rate of return after tax of 14.
4%.
Using the rule of 72 is easier to remember than using equations and is therefore more user friendly for those who are not financially inclined.
The rule of 72 works in reverse too and tells us how long it takes for our debts to double.
If you owe $10,000 on your credit card at 18% interest and you don't pay it off, your debt will double in around 4 years.
It's a frightening thought and a real incentive to pay off that high interest debt.
The rule of 72 also can help us understand inflation.
By using a 4% yearly inflation and the rule of 72 we can see that this means that average prices double in 18 years (72 divided by 4 equals 18).
When you hear older people talk about the "good old days" and low prices they meant it.
However incomes also tended to be lower in the past.
Benjamin Franklin said, "Time is Money" and now you know just what he meant.
Obviously, in the real world you are unlikely to have a constant interest rate unless your investment is in a long-term fixed income instrument.
This rule is purely a tool to help illustrate the impact that time and rate of return has on your money without the consideration of taxes and inflation.
Use the rule of 72 to marvel at the magic of compound interest, use it to avoid doubling your debt and use it to understand inflation.