Today the world is blessed with smartphones and their apps, but anyone who needed to do some ‘on the spot’ calculating in the past had to rely on a range of genuine ‘old school’ methods. Shortcuts were few and far between, but there were a few tricks you could rely on.
One such ‘trick’ was the Rule of 72, a wonderful help when analysing potential investment returns. Quite simply, it is a method to calculate the effects of compound interest as mental arithmetic.
Hence it is a very useful tool for any ‘on the spot’ financial estimates you might need.
All you need to do is divide an investment rate of return into the number 72. The resulting answer is the number of years it takes for your initial investment to double.
So let’s say you’re getting a 5% return, just divide 72 by 5 = 14.4. Presuming you keep up the 5% re- turn on the life of the investment, your money is on track to double in 14.4 years. What if you want to double your money in 10 years? Well, you need an interest rate of, 72/10 or 7.2%.
Some of you reading this may not be too excited by this next bit, but, the Rule of 72 can also be handy for a quick evaluation of economic conditions.
For example, if GDP grows at 3% a year, the economy doubles in 72/3 or 24 years. And if growth slips to 2%, it will take 36 years to double. But, should Government policy be able to boost that to 4% the economy will have doubled in 18 years.
Pretty dry I know, but GDP growth directly impacts share values and long-term investment fore- casts, so its handy to at least be able to extrapolate these numbers.
But not only does the Rule of 72 work for growth estimates, you can also use it for expenses. So if you’re paying 15% interest on your credit card the amount you owe will double in only 72/15 or 4.8 years! No surprise there.
The Rule of 72 was a very handy method of quickly calculating an investment return. It was particularly good whilst in front of clients. They were always impressed with any display of mental agility.
Of course today we have all sorts of methods to do calculations but rather than being a relic of a by- gone era, the Rule of 72 can still be useful when needing a quick financial analysis. At the very least, it will certainly come in handy if your phone battery suddenly goes dead!
Thanks for reading and look forward to seeing you again. Oh and don’t forget to check out my best financial planning tips so you can get your finances into shape. Homepage
