What's the rule of 72?

What's the rule of 72?

Most of us have heard of the parable of the talents, right?

Each person is given the same amount of talents, one keeps it, one spends it and one grows it. While at the time you heard this story it might have just been an only Sunday school tale but it offers a very important teaching when it comes to money and money personalities. 


The person who spends their talent reflects the person who spends their money aimlessly. No plan and every time some cash comes their way, it’s gone. The person who saves their talent, reflects the critical saver, too smart to spend, too scared to invest and grow. This personality usually just coasts on their saving habits. Lastly, we have the person who invests their talent and ultimately grows it. This person reflects the forward-thinking money manager. Brave enough to invest smart enough to grow their money.


Most people’s money journey reflects all three at different stages of their life. The first is the spending stage, second is the saving stage, and third (once equipped with more information) is the investing stage.


People who reach the investing stage have a different approach to money. As opposed to spending and saving, they are always thinking about how to grow their money, so they can invest more of it elsewhere. However, it can be a precarious ordeal trying to calculate how much time it will take for you to double your investment.


“I have put $10,000 in this compound interest account with an interest rate of 3% a year. I really need to figure out how long the money will take to double so I can plan what I want to do with the extra cash!”


Instead of wracking your brain over interest rates, calculators and calendars, what if I told you a single calculation could answer your question. In comes the rule of 72.


Defined, The Rule of 72 is a simplified formula that calculates how long it'll take for an investment to double in value, based on its rate of return.


If you have put $10,000 in a compound interest rate account, at a rate of 3% a year. The calculations will be:




72

-------------- = Years to double

Interest rate


72 

----- = 24 years

3  


The Rule of 72 formula gives a reasonably accurate timeline on how long it will take to double your money. It’s a useful shortcut that provides you a simple calculation that helps you plan for and around your money! Nifty, right?


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