Most People Ignore This Simple Math Trick in assessing financial goals
Ever wondered how long it would take for your investment or savings to double? Enter the Rule of 72 and its lesser-known cousin, the Rule of 69.
These rules are quick, handy formulas to estimate the growth of your money over time. Here’s how they work:
What is the Rule of 72?
The Rule of 72 is a simple formula used to estimate the number of years it will take for an investment to double in value, given a fixed annual rate of interest. Just divide 72 by your interest rate, and you have an approximation of how many years it will take to double your money!
Example: If your investment has an annual interest rate of 6%, simply calculate 72 / 6 = 12 years to double your investment.
What is the Rule of 69?
Less commonly mentioned but equally fascinating is the Rule of 69. This rule is specifically helpful when dealing with continuous compounding interest.
It works similarly to the Rule of 72 but used for a special type of growing called ‘continuous compounding,’ which is like your money growing a tiny bit all the time, non-stop. Additionally, for more precision, add 0.35 to your division.
Example: With a continuous interest rate of 6%, you would calculate 69 / 6 + 0.35 ≈ 11.85 years for your investment to double.
Why Use These Rules?
These rules are great for quick mental math that can help you understand and compare different investment opportunities without a calculator or complex equations.
They are particularly useful during meetings or quick evaluations when you need to make fast, yet effective, financial decisions.
Drawbacks: While incredibly handy, these rules do have limitations. They are approximations and work best with moderate rates of return (between 6% and 10%). For very high or low rates, the rules become less accurate. Moreover, they don’t account for variables like additional contributions, withdrawal rates, or fluctuating interest rates over time.
Takeaway: The Rule of 72 and Rule of 69 are powerful tools in your financial toolkit. They provide a quick snapshot of how investments can grow but remember, they are just starting points. For more detailed planning, a deeper dive into specifics with financial tools or consulting with a financial advisor is recommended.
Stay Smart with Your Investments! Understanding these rules can elevate your financial literacy and help you make informed decisions. If you found this explanation helpful, give it a thumbs up, share, and follow for more insights!