Tuesday, August 24, 2010

Learning the Rule of 72

Most if not all guitar players and many musicians playing other instruments have at some point learned about the Minor Pentatonic Scale or its bigger cousin, the Blues Scale.  It is one of those essential tools that you can rely on when everything else fails and you need to figure out how to play at least a somewhat acceptable solo. 

In Finance, the Rule of 72 is equally powerful and it too can be used when everything else fails.
This is our first post on learning the rule of 72, considered by many finance gurus as one of the most essential rules of personal finance that you can apply in your daily lives.
The rule of 72 is widely known as a quick way to compute the doubling time of an investment.

Here’s how it works: 
Take the number 72 divide it by the interest rate to find out the number of years it takes to double your initial investment at that given rate.   The formula looks like this:

72 ÷ i (interest rate) = y (years)
For example, the rule of 72 states that $100 invested at 10% would take 7.2 years to double.

72 ÷ 10 (%) = 7.2 (years)
The rule of 72 also works in another way.  If you want to know how much of a return you need to double your investment in say 10 years, the calculation works like this:

72 ÷  10 (years) = 7.2 (%)
We will have many opportunities to use this rule using all kinds of examples. For now, just remember:

72 ÷ interest rate gives you the years you need to double your money.
For questions, comments and suggestions, please feel free to use the commentary section or email: clemens.kownatzki@fxistrategies.com
Please help us spread the word and promote financial literacy!

1 comment:

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