The process of getting a firm grasp on one's finances can be overwhelming, for sure, but there are numerous convenient tools that can be used to make quick calculations and one such tool is the Rule of 72.
The Rule of 72 is a mathematical shortcut which you can use to quickly calculate roughly how long it will take for your money to double (not taking into account inflation or taxes) assuming you start with a fixed amount of principal at a fixed annual interest rate and don't add a penny to it.
Here's how it works:
Say you have $500 in an account which is earning 3% and you want to know how long it would take for it to double. You'd divide 72 by the interest rate to get an approximation as to how many years it would take at your fixed annual interest rate before $500 became $1,000.
72 divided by 3 = 24 therefore it would take 24 years for $500 to become $1,000 (assuming no further additions to principal and a fixed annual interest rate of 3%).
You can also use the formula the other way around. Say you have a specific amount that you'd like to invest and want to calculate the annual interest rate required to double your money by a certain time horizon.
In this example if you're starting out with $10,000 and want it to double in 4 years., you'd divide 72 by the number of years to derive the interest rate.
72 divided by 4 = 18 so your principal investment of $10,000 would double in 4 years assuming you earned an 18% annual interest rate.
The Rule of 72 is a powerful tool for estimating the effect of any growth rate, not just those that are financially related. It can be a great addition to anyone's mathematical arsenal given its utility and ease of use, two characteristics which also can help to make the subject of math as well as financially related concepts in general a bit less intimidating and more approachable.
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