Albert Einstein is believed to have said "The most powerful force in the universe is compound interest." The simple mathematical formula for computing compounded interest is called the rule of 72.
Although Einstein is best known for his theory of relativity, some declare that his discovery of the Rule of 72 is more important. Some skeptics however, declare that this rule had been known long before he was born. The majority nevertheless, believe that it was Einstein who popularized the rule.
What then is this Rule of 72 and why call it the bedrock of investment?
The Rule of 72 is paramount because it can help you compute for the following:
1.) What interest rate enables you to double your money quickly? 2.) How many years do you wait before your money doubles?
Divide 72 by a certain interest rate. This gives you the number of years it will take before your money doubles. Apply the Rule of 72: n = 72 / I where n is the number of years it takes to double your money at the interest rate represented by i.
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).
You may prefer a time deposit account because savings account earn a very low interest rate. Time deposits in Philippine banks earn an average of 4% interest annually. Therefore, it will take only 18 years for your P100,000.00 time deposit to double into P200,000.00 (72 / 4 = 18).
In comparison, consider if you invested your P100,000.00 in a scheme that would earn 12% interest. Now, it would take only 6 years to double your money! (72 / 12 = 6).
There is a cousin to the Rule of 72 that computes the number of years it takes to triple your money - the Rule of 115. Using the same formula, just substitute 115 for 72.
Want to learn more about investing ? Visit the blog of Zigfred Diaz where he writes about the Rule of 72 and stock market investing.
