What is the rule of 72?

Let’s discuss the rule of 72 today

The Rule of 72

Investors invest for one primary reason – to make a return on their money. Compound interest is the friend of an Investor.

What is Compound Interest?

Compound interest is interest that accrues based on the total balance of principal and accumulated interest. Compound interest is a powerful tool for getting the financial glory.

What is the rule of 72?

The “Rule of 72” is a simple, quick and easy way to calculate the length of time in which money doubles at a certain interest rate.The Rule of 72 is a math formula that tells you how long it will take to double the value of the money you invest:

Firstly, Find out your interest rate…
Second… do the math!

  • 72 / interest rate = # of years
  • Example: $1000 invested at 6% interest rate
  • 72 / 6 = 12 years –> In 12 years $1000 will double at 6%!

In order to double your money within a certain amount of years, you can flip flop the Rule of 72 to find out what percent rate at which you need to invest:

First, Decide the number of years you want to invest…
Second … do the math!

  • 72 / # of years = interest rate
  • Example: $1000 invested for 8 years
  • 72 / 8 = 9 (% interest rate) –> In 8 years $1000 will double at 9%!

Lets do one more example to Prove it to yourself that money doubles in 7 years at 10% – use the below  calculator to multiply the number 1 by 1.1 seven times as follows:

Where,
  • 1 is number of years
  • 1.1 means 10% interest rate added each year
1 x 1.1 = 1.1
1 x 1.1 x 1.1 = 1.21
1 x 1.1 x 1.1 x 1.1 = 1.311
1 x 1.1 x 1.1 x 1.1 x 1.1 = 1.4641
1 x 1.1 x 1.1 x 1.1 x 1.1 x 1.1 = 1.61051
1 x 1.1 x 1.1 x 1.1 x 1.1 x 1.1 x 1.1 = 1.771561
1 x 1.1 x 1.1 x 1.1 x 1.1 x 1.1 x 1.1 x 1.1 = 1.9487171

The final answer 1.9487171 = approximately 2(Double)

When you consider that mathematical factor and then make the necessary adjustments to the investable amount and the rate of growth adjusted for taxes you’ll be well on your way to understanding the investment process, and be far better able to select the “correct” investment tax structure for your assets. i.e retirement plans, tax-deferred investment accounts, charitable trusts etc.

Also, read how you can become a better investor.

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