Math tricks are a practical way of saving time and understanding the big picture on the fly. Have you ever appraised an investment opportunity and wondered how long that investment would take to double? How many years would it take to double my money if I invested on this asset today? What return on investment do I need to double my money in 3 years? Enter the Rule of 72. In the following section, we will analyze this ancient finance tool, explore its applications, and dissect its impact on everyday finance.
The Rule of 72
The rule of 72 is simple and practical. Divide 72 by your investments interest rate to find the number of years need for that investment to double. It should be noted that the rule of 72 is not perfect and is an approximation that is practical enough to use during everyday finance and investing ordeals.
Rule of 72: 72 / (Intereste Rate) = Number of Years for Investment to Double
Lets explore some example where the rule of 72 may be used to quickly appraise an investment on the spot, in your head.
Example 1: You visit a bank offering 8.50% annual interest on your Fixed Deposit. How many years will it take for your investment to double?
Rule of 72: 72 / 8.5 = 8.47
Answer: It would take you approximately 8 and a half years to double your investment.
Example 2: What ROI rate do you need to double your money in 3 years?
Rule of 72: 72 / 3 = 24
Answer: If you can manage to get a 24% return on investment, your money will double in approximately 3 years.
Example 3: You have a credit card with an interest rate of 24%. Your credit card liability is $25,000. What will your credit card balance be if you pay the minimum balance due for the next 3 years?
Rule of 72: 72 / 24 = 3
Answer: You will have paid $25,000 worth of interest and will have the credit card liability of $25,000 fully intact.
Example 4: You hear on the news that the rate of inflaction is up to a record 10%. How will this affect your savings account??
Rule of 72: 72 / 10 = 7.2
Answer: Your savings will lose half its value in approximately 7.2 years.
As you can see, the rule of 72 is a practical solutions to basic financial questions. The more you use this tool, the better you'll get at evaluation financial opportunities, and a better investor you'll become.
