Albert Einstein is credited with saying that the most powerful force in the universe is compound interest. The rule of 72 explains compound interest very simply, and is useful for quick financial calculations, like finding out when your money will double.
If you're an investor, a financial pro or a maths student you probably already know about the Rule of 72, or, at least, the power of compounding. We've also briefly noted this money hack before for figuring out how long it will take to double your money on an investment.
wikiHow's explanation of the Rule of 72 is filled with more maths formulas and practical examples for applying the rule to different situations. It has the main rule for estimating the doubling time:
Let R * T = 72, where R = the rate of growth (for example, interest rate), T = doubling time (for example, time it takes to double an amount of money).
Plug in the value for R = rate of growth. For example, how long does it take to double $US100 to $US200 at an interest rate of 5% per annum? Substituting R = 5, we get 5 * T = 72.
Solve for the unknown variable. In the example given, divide both sides by R = 5, to get T = 72/5 = 14.4. So it takes 14.4 years to double $US100 to $US200 at an interest rate of 5% per annum.
The video above shows how this works.
The article also shows how to use the Rule of 72 to estimate growth rate (using the same formula, you can find out what interest rate your investments will need for you to double your money in a given number of years), as well as how long you have until your money will lose half its capital as the result of inflation.
While compounding interest is great for investments, the Rule of 72 can really work against you when it comes to debt:
At an average interest rate of 18%, the credit card debt doubles in just 4 years (18 * 4 = 72), and quadruples in only 8 years, and keeps escalating with time. Avoid credit cards like the plague.
Learn more about this simple yet powerful rule in finance from the link below.
How to Use the Rule of 72 [wikiHow]