The Rule of 72
Albert Einstein called compound interest The 8th wonder of the world. Here's a simple rule you may use to work out how the savings or investments could grow with compound interest. The principle of 72 is a general guideline that provides approximations, but it's surprisingly accurate. The time it can take for one sum of money to double with a known rate of interest. The speed of return you need to earn in the amount to double inside a known time period. Here is how it works: Divide the rate of interest into 72. The result tells you just how long it may take for the money to double without further economies.
If, for instance, you have $10 000 earning a steady speed of 6% interest you'd divide 72 by 6 = 12. This means every 12 years your $10, 000 will double, so: After 12 years you've $20, 000 After 24 years you've $40, 000. If you want to determine what rate of interest you will have to bring in to double the money in say five years you'd subsequently divide 72 by the number of years being 5. This gives an answer of 14.4 so it'd need to reach a speed of return after tax of 14.4%. Using the principle of 72 now it is easier to remember than using equations along with is thus more user friendly for all those that're not economically inclined.
The principle of 72 works in reverse also and tells us how long it can take for our debts to double. If you owe $10, 000 on your credit card at 18% attention and you don't pay it off, the debt will double to about 4 years. It is frightening thought and a real motivation to pay away that high interest debt. The principle of 72 also might help us understand inflation. Simply by utilizing a four percent yearly inflation and the principle of 72 we may see that this implies that average prices double in 18 years. Whenever you hear older people talk about the Good old days along with cheap prices they meant it.
Nevertheless, incomes also tended to be lower in the past. Benjamin Franklin said, Time is Money along with now you know only what he meant. Clearly, in the real world you're unlikely to possess a continuous rate of interest unless your investment is in an extended term fixed income instrument. This principle is solely an instrument to help demonstrate the impact that time and speed of return has on the money without the consideration of taxes along with inflation.
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