Posted by Allen White On November - 23 - 2010 Comments Off on The Simple “Rule of 72”

The Rule of 72 is a brilliant maths trick I learned a while ago that I have since used countless of times. It allows you to calculate simply how long it will take for something to double in value, which naturally is always a good thing to happen when it comes to money!

So the trick is simple:

(72) divided by (the rate of interest/growth) = number of years it will take to double the initial value.

For example, at 6% interest, your money takes 72 divided by 6 = 12 years to double in value. Or at 12% interest, it will only take 6 years to double.

Here is an interesting non-financial example to show what implications doubling could have in a real life scenario.

Suppose your a City Planner in charge of catering for the growth of a city with a population of 1 million people. Now planning, developing and building another million people will take a lot of time, but luckily at a 2% population growth, you have 36 years until the population doubles. Now imagine if the rate of growth jumped only 1% to 3%, you will now only have 24 years to build enough houses for one million people as the population doubles, that’s a staggering 12 years less!

Before I finish this post, I have to make a disclaimer, the rule of 72 is not completely accurate and it’s purpose is to make quick on the spot estimations, and not very useful if you needed a precise figure. As the rate gets higher and the years to double decreases, the difference between the estimated value and the real value becomes larger. For example, at 100% growth, it is obvious that your money will double every year, but with the rule of 72, you will get a figure of .72 years, which is quite a bit off. On the other hand for a low rate calculation such as 2%, the value you get with Rule of 72 is 36 years, while the real amount is 35 years, not too far off when you consider the time scale. So my suggestion is that for higher rates, use the calculator!

To check out the rule of 72 in action, please read this post here: Why it’s Great to Be Young While Investing

Categories: Investing, Money, Saving Money

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