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Saturday, June 4, 2011

Double your money by Rule of 72


Double your money by Rule of 72

Double your money by Rule of 72
The Rule of 72 is a rule of thumb that can help you quickly calculate on your mind (mental-math) how fast your money grow at any rate of return or interest, and also it will tell you how many years it will take your money to double in value.

Although not exactly accurate but this rule allows the investor to quickly and efficiently answer two questions:
  • How many years will it take me to double my money if I earn nth% interest?
  • What interest rate must I earn if I wish to double my money in nth years? 

The Rule of 72 is useful for financial estimates and understanding the nature of compound interest. Compounding Interest is the addition of interest to the principal, so that from that moment on, the interest that has been added to principal also earns interest.

Here’s the formula:

Years to double = 72 / Interest Rate

Examples:
  • At 6% interest, your money takes 72/6 or 12 years to double.
  • To double your money in 10 years, get an interest rate of 72/10 or 7.2%.
  • If your country’s GDP grows at 3% a year, the economy doubles in 72/3 or 24 years.
  • If your growth slips to 2%, it will double in 36 years. If growth increases to 4%, the economy doubles in 18 years. Given the speed at which technology develops, shaving years off your growth time could be very important.
You can also use the rule of 72 for expenses like inflation or interest:
  • If inflation rates go from 2% to 3%, your money will lose half its value in 36 or 24 years.
  • If college tuition increases at 5% per year (which is faster than inflation), tuition costs will double in 72/5 or about 14.4 years. If you pay 15% interest on your credit cards, the amount you owe will double in only 72/15 or 4.8 years!
When dealing with low interest rates of return, the Rule of 72 is fairly accurate. See the chart below for comparison between the numbers of years given by the rule of 72 and the actual number of years it takes an investment to double.

Rate of Return
From
Rule of 72
Actual numbers
of Years
Differences of Years
2%
36.0
35
1.0
3%
24.0
23.45
0.6
5%
14.4
14.21
0.2
7%
10.3
10.24
0.0
9%
8.0
8.04
0.0
12%
6.0
6.12
0.1
25%
2.9
3.11
0.2
50%
1.4
1.71
0.3
72%
1.0
1.28
0.3
100%
0.7
1
0.3

However, keep in mind that this rule is for guideline only. The rule of 72 is simply a tool to illustrate and show the impact of  time and rate of return on your money. 

To further understand the Rule of 72, you can watch YouTube video below. Just be patient because the Rule of 72 is introduced later on the video.


Remember, time are can be either your greatest asset, or your worst enemy. The sooner you start for investing the better, even if it is just a small amount, it will provide more time for your money to compound. 

On the other hand, every passing week, month, or year is time that you can never get back. It is up to you to decide if you want time to be on your side or working against you.





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