Sunday, June 20, 2010

The Rule of 72

The Rule of 72 is a simple formula to out find the number of years required to double your money at a given compound interest rate. Here is the formula:

Years to double your money = 72 / Interest Rate

For example, if your bank is giving you 3% compound interest, you will divide 72 by 3, which means that you will take 24 years to double your money.

This formula is useful to understand the nature of compound interest. One thing to note that a percentage point difference in the interest rate will cause a big difference in the long run in the amount of time to double your money. For 1% interest, it will take 72 years to double your money, and for 2% interest, it will take 36 years to double your money. That is a big difference of 36 years!

1 comment:

MSAPersonalFinance said...

I ever heard about the term "rule 72" and the only thing I knew about it is got something to do with home mortgage. Thanks for providing such a useful information for a beginer like me.

Have you started your journey towards financial freedom?