MONEY 80 - RULE 72

THIS IS MY 80^TH BLOG ON UNDERSTANDING MONEY TOOLS

This is going to be one of my shorter blogs on Understanding Money Tools, however if you don’t know this information already, I think you will find it quite useful.

A friend asked me how to quickly approximate returns on investment so that he could do this in the “field” without having to revert to his cell phone calculator. This is especially handy when discussing numbers with potential investors.

There are two common methods.  One is really broad in scope and that is the Rule of 7 and 10, the other is the Rule of 72.

The Rule of 7 and 10 can be worked two ways.  If you use 7 as the number of years it takes to double your money on a compounded basis your interest rate is 10%. If you use 10 years to double your money your investment is being compounded at 7%.

The Rule of 72 is more accurate and will apply to more varied interest rates and time lines. 72 is commonly used as the number is very divisible by many numbers.  The same application applies as the Rule of 7 and 10. As an example, let’s say we are offered a 4% return on an investment. How many years will it take to double my money on a compounded interest basis? 18 years. Simply divide 4 into 72 and the result is 18.  Conversely, if you know your money will double in 18 years, divide 18 years into 72, your resultant interest rate is 4%.

If you want to be more exacting with the time frame or the interest rate, use 69.3, or round up to 70.  This will give you a closer number, however you most likely will need to reach for your calculator!