I learned the rule of 72 when I was a youngster. I’m not sure how old I was exactly but I know that it opened up a whole new world for me and gave me insights that let me see the world in a different way than before. Why it works isn’t important and is beyond the math skills of most people, just recognize that it does. The rule of 72 is so important that it should be taught in every school. If it were then every child would understand compound interest.
What is this wonderful rule? The rule has one purpose. It is designed to let you estimate with amazingly close accuracy how long it would take a person to double their money at a given interest rate. I use it almost daily to determine the particular merit of an investment. It is a good skill to have when making investment decisions. The formula is simple. It is as follows,
Years to double = 72 / Interest Rate
For example, if you want to know how long it will take to double your money at eight percent interest, divide 8 into 72 and get 9 years. If you want to know how long it will take to double your money at 12 percent interest, divide 12 into 72 and you get 6 years.
Lets have a quiz to see if you get it. If you have $10,000 and you invest it at 6% how many years will it take for it to grow to $160,000? Let’s do it together. Divide 6% into 72 and you know it will take 12 years for your money to double at which point you will have $20,000. 12 years later, 24 years after you started, you will have $40,000. 12 years later, 36 years after you started you will have $80,000. 12 years later, 48 years after you started, you will have $160,000. The answer is 48. It will take you 48 years at 6% for $10,000 to grow to $160,000 using the rule of 72. If you use a calculator to check for accuracy you find that the rule is surprisingly accurate. The actual number of years it takes is 47 years and 7 months. The rule of 72 is correct to within 5 months. Not bad.
Lets take another quiz. If you have $10,000 and you invest it at 12% how many years will it take for it to grow to $160,000? Let’s also do this one together. Divide 12% into 72 and you know it will take 6 years for your money to double at which point you will have $20,000. 6 years later, 12 years after you started, you will have $40,000. 6 years later, 18 years after you started you will have $80,000. 6 years later, 24 years after you started, you will have $160,000. The answer is 24 in this case. It will take you 24 years at 12% for $10,000 to grow to $160,000 using the rule of 72. What’s the actual number if we use a calculator? In this case the actual number of year sit takes is 24 years and 6 months. Once again the rule is incredibly accurate.
Learn this rule because it will help you throughout your life.
Financial Tales has been promoting Financial Literacy since September 29, 2008.
