"The most powerful force in the universe is compound interest," said Albert Einstein. It is expressed in a mathematical formula called the Rule of 72.
Some people go as far as saying that Albert Einstein's greatest discovery was the Rule of 72, not the theory of relativity. Others say that the rule had been in existence even before Einstein was born. But most people agree that Einstein popularized it.
What is the Rule of 72 and why is it called the foundation of all investment?
You will appreciate the importance of the Rule of 72 as you use it to arrive at the following:
1.) What interest rate will quickly double your money? 2.) How many years does it take to double your money?
For the answer, divide 72 by a certain interest rate. The result is the number of years it will take to double your money. Expressed mathematically, the Rule of 72 is: n = 72 / I, where n is the number of years it will take to double your money while i is the interest rate.
For easier understanding, let us take this example: if you put your P100,000.00 in the bank, which gives only 1% interest rate, it will take 72 years for your money to become P200,000.00. (72 / 1 = 72).
So, you're thinking of putting it into a time deposit account because savings deposit earn at a very low interest rate. Time deposits in Philippine banks earn about 4% interest per annum. But even then, it will still take 18 years for your time deposit of P100,000.00 to become P200,000.00. (72 / 4 = 18).
Consider investing your P100,000.00 in a business that earns at 10% interest rate. In 6 years you would have doubled your money to P200,000.00! (72 / 12 = 6).
To determine how long it will take to triple your money, use the cousin of the Rule of 72 - the Rule of 115. Using the same formula, just replace 72 with 115. - 32163
Some people go as far as saying that Albert Einstein's greatest discovery was the Rule of 72, not the theory of relativity. Others say that the rule had been in existence even before Einstein was born. But most people agree that Einstein popularized it.
What is the Rule of 72 and why is it called the foundation of all investment?
You will appreciate the importance of the Rule of 72 as you use it to arrive at the following:
1.) What interest rate will quickly double your money? 2.) How many years does it take to double your money?
For the answer, divide 72 by a certain interest rate. The result is the number of years it will take to double your money. Expressed mathematically, the Rule of 72 is: n = 72 / I, where n is the number of years it will take to double your money while i is the interest rate.
For easier understanding, let us take this example: if you put your P100,000.00 in the bank, which gives only 1% interest rate, it will take 72 years for your money to become P200,000.00. (72 / 1 = 72).
So, you're thinking of putting it into a time deposit account because savings deposit earn at a very low interest rate. Time deposits in Philippine banks earn about 4% interest per annum. But even then, it will still take 18 years for your time deposit of P100,000.00 to become P200,000.00. (72 / 4 = 18).
Consider investing your P100,000.00 in a business that earns at 10% interest rate. In 6 years you would have doubled your money to P200,000.00! (72 / 12 = 6).
To determine how long it will take to triple your money, use the cousin of the Rule of 72 - the Rule of 115. Using the same formula, just replace 72 with 115. - 32163
About the Author:
Want to learn more about investing ? Visit the blog of Zigfred Diaz where he writes about the Rule of 72 and stock market investing.
