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.
Some people go as far as saying that Albert Einstein's greatest discovery was the Rule of 72, not the theory of relativity. Others say that the rule had been in existence even before Einstein was born. But most people agree that Einstein popularized it.
How could the Rule of 72 help make investment decisions?
The Rule of 72 helps in investment decisions because it determines the following:
1.) What interest rate enables you to double your money quickly? 2.) How many years do you wait before your money doubles?
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.
Let's use an example to illustrate: Your P100,000.00 deposit in a savings account will take 72 years before it doubles to P200,000.00 because the bank only gives a measly 1% interest rate. (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).
In comparison, consider if you invested your P100,000.00 in a scheme that would earn 12% interest. Now, it would take only 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. - 31970
Some people go as far as saying that Albert Einstein's greatest discovery was the Rule of 72, not the theory of relativity. Others say that the rule had been in existence even before Einstein was born. But most people agree that Einstein popularized it.
How could the Rule of 72 help make investment decisions?
The Rule of 72 helps in investment decisions because it determines the following:
1.) What interest rate enables you to double your money quickly? 2.) How many years do you wait before your money doubles?
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.
Let's use an example to illustrate: Your P100,000.00 deposit in a savings account will take 72 years before it doubles to P200,000.00 because the bank only gives a measly 1% interest rate. (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).
In comparison, consider if you invested your P100,000.00 in a scheme that would earn 12% interest. Now, it would take only 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. - 31970
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.
