Rule of 72

Calculate compound interest right in your head.

Having a phone call from your banker or just calculating your EMI, compound interest is always a rocket science for you. Either you need a scientific calculator or some worksheet application like excel to calculate this. Wait… You can do this right in your head without anything.

I am not joking. Its very simple. As simple as table of six. The technique is using Rule of 72.

Rule of 72 a very useful skill to have because it gives you a lightning fast benchmark to determine how good (or not so good) a potential investment is likely to be.

The rule says that to find the number of years required to double your money at a given interest rate, you just divide the interest rate into 72. For example, if you want to know how long it will take to double your money at eight percent interest, divide 8 into 72 and get 9 years (assuming that the interest is annually compounded, by the way).

As you can see, the “rule” is remarkably accurate, as long as the interest rate is less than about twenty percent; at higher rates the error starts to become significant.

OK. That’s fine. How about calculating the rate of interest?

Just put your head into the reverse gear.

If you want to double your money in six years, just divide 6 into 72 to find that it will require an interest rate of about 12 percent.


Puzzled? Want to know Why the rule of 72 works.

Visit following links:

1. http://www.moneychimp.com/features/rule72_why.htm
2. http://en.wikipedia.org/wiki/Rule_of_72

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