Why Einstein's Rule of 72 is a rule of thumb
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[edit] Introductory Note
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[edit] Reason
The compound interest rule of 72 was discovered by Albert Einstein. Referring to compound interest, Albert Einstein is quoted as saying: "It is the greatest mathematical discovery of all time."
Albert Einstein (1879 - 1955) called the compound interest rule of 72 the 8th Wonder of the World - It can work for you, or against you. When you invest it works for you. When you borrow it works against you!
Check out our compound interest calculator. Compound Interest Rule of 72
Step 1 of 2: How long does it take my investment capital to double?
This step teaches you how to determine the number of years it will take for your investment or debt to double in value.
Divide the number 72 by the percentage rate you are paying on your debt, or earning on your investment. Here are two examples...
You borrowed $1,000 from your friend, who is charging you 6% interest. 72 divided by 6 is 12. That makes 12 the number of years it would take for your debt to your friend to double to $2,000 if you did not make any payments.
You have a savings account with $500 deposited in it. It earns 4% interest from the bank. 72 divided by 4 is 18. It will take 18 years for your $500 to double to $1,000 if you don't make any deposits.
Remember: 72 divided by the interest percentage is the number of years it takes to double.
That is the end of step one. Step two will blow your socks off! We ask that you tell two friends about this web site due to the value of the information we are giving you.
Step 2 of 2: How many times will my investment money double?|
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This step teaches you how important it is for your money to double as many times as possible, and for your debts to double as few times as possible.
Determine how many years you will keep your investment before cashing it in. Divide that by the number of years it will take to double each time, the number you figured out in step one. Learn To Master The Compound Interest Calculations
Now look at what happens to your money each time it doubles...
$1 ... $2 ... $4 ... $8 ... $16 ... $32 ... $64 ... $128 ...
You can see that it makes a big difference how many times your money doubles. If you can make it double only a few more times by making just slightly better investments, you can end up with many times more money at retirement, or whenever you cash in your investment.
Think about how fast your debts can double with high interest rates, such as those charged on most credit card accounts.
You have learned the basics in order to take advantage of Albert Einstein and the rule of 72.
Win The Money Game!
Leverage old money you are already spending to create new money you can invest. By lowering your mortgage payment you free up cash, which you can then invest. Your goal is to have compound interest work for you and not against you.
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- Assume that you have an initial investment of $12,000 and you want to double it in 9 years, what interest rate would you be looking for?
Answer: 72 / 9 = 8
- As the investor, you will be looking to secure an interest rate of 8% over the life of your investment. This will result in the doubling of your investment in nine (9) years. Again, you may test the accuracy of the Rule of '72 by using our Compound Interest Table.
- By now, you may be saying this is the best thing you have come across in a while...real simple isn't it? Well, as you know life is not that simple so there have to be a catch somewhere, and there is. The Rule of '72 does have some limitations.
- While the rule is fairly accurate for interest rates below 20%, the accuracy starts to decline at just about 20% and gets worse as the interest rate increases. For calculations resulting in or using interest rates below 20%, the results are extremely accurate. However, for calculations resulting in or using interest rates at 20% or above the results are less and less accurate as the interest rate gets higher and higher.
- The Rule of 72 is an interesting and easy way to determine the interest rate, but the real message from the above should be the power of compounding. The world’s most renowned genius, Albert Einstein referred to compounding as the “most powerful force in the universe.” This quote may be stretching it a little, but it certainly isn’t far from the truth.
- Compounding is a very important part of the investment process, and every serious investor should understand and seek out the benefits of compounding. Compounding can add significant growth to your investment when compared to simple interest.
[edit] References
1. Rule of 72
