The Rule of 72 - The Bedrock Of Investment
To Albert Einstein is attributed these words: "The most powerful force in the universe is compound interest." The rule of 72 is just a simple mathematical computation of compounded interest.
Although Einstein is best known for his theory of relativity, some declare that his discovery of the Rule of 72 is more important. Some skeptics however, declare that this rule had been known long before he was born. The majority nevertheless, believe that it was Einstein who popularized the rule.
How could the Rule of 72 help make investment decisions?
You will appreciate the importance of the Rule of 72 as you use it to arrive at the following:
1.) At what interest rate can you quickly double your money? 2.) How many years will it take to double your money?
For the answer, divide 72 by a certain interest rate. The result is the number of years it will take to double your money. Expressed mathematically, the Rule of 72 is: n = 72 / I, where n is the number of years it will take to double your money while i is the interest rate.
For easier understanding, let us take this example: if you put your P100,000.00 in the bank, which gives only 1% interest rate, it will take 72 years for your money to become P200,000.00. (72 / 1 = 72).
Because of low interest rates for savings account deposits, let's assume you preferred to keep your money in a time deposit account. In the Philippines, time deposits earn an average of 4% interest annually. Your P100,000.00 in time deposit will take about 18 years to double or become P200,000.00 (72 / 4 = 18).
How about putting your P100,000.00 into a business that earns 12% interest rate? It would take just 6 years to double your money! (72 / 12 = 6).
There is a cousin to the Rule of 72 that computes the number of years it takes to triple your money - the Rule of 115. Using the same formula, just substitute 115 for 72. - 23226
Although Einstein is best known for his theory of relativity, some declare that his discovery of the Rule of 72 is more important. Some skeptics however, declare that this rule had been known long before he was born. The majority nevertheless, believe that it was Einstein who popularized the rule.
How could the Rule of 72 help make investment decisions?
You will appreciate the importance of the Rule of 72 as you use it to arrive at the following:
1.) At what interest rate can you quickly double your money? 2.) How many years will it take to double your money?
For the answer, divide 72 by a certain interest rate. The result is the number of years it will take to double your money. Expressed mathematically, the Rule of 72 is: n = 72 / I, where n is the number of years it will take to double your money while i is the interest rate.
For easier understanding, let us take this example: if you put your P100,000.00 in the bank, which gives only 1% interest rate, it will take 72 years for your money to become P200,000.00. (72 / 1 = 72).
Because of low interest rates for savings account deposits, let's assume you preferred to keep your money in a time deposit account. In the Philippines, time deposits earn an average of 4% interest annually. Your P100,000.00 in time deposit will take about 18 years to double or become P200,000.00 (72 / 4 = 18).
How about putting your P100,000.00 into a business that earns 12% interest rate? It would take just 6 years to double your money! (72 / 12 = 6).
There is a cousin to the Rule of 72 that computes the number of years it takes to triple your money - the Rule of 115. Using the same formula, just substitute 115 for 72. - 23226
About the Author:
Want to learn more about investing ? Visit the blog of Zigfred Diaz where he writes about the Rule of 72 and stock market investing.
posted by X - Men @ 3:36 AM
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