August 26, 2011

The Rule of 72


Hey Fashionable and Financially Aware People!

Its Finance Friday Time again! Sorry it’s been soooooo long since we’ve had one of these. Nonetheless, Today’s Finance Friday Topic is The Rule of 72.

Albert Einstein likes to call this the 8th Wonder of The World, and I might have to agree with him. Simply put, The Rule of 72 is the way to determine the amount of time it will take an investment double (using a fixed annual rate of interest).


When you take the number 72 and divide it by the interest your investment is earning annually, you will determine the amount of time it takes for your money to double. The time is usually quantified by years. 








Let’s illustrate:

Let’s say you would like to invest $200 with a compounding interest rate of 9% per year.

Using The Rule of 72 you would take 72/9 = 8

Thus, it would take 8 years for your $200 investment to
be worth $400 at an annual interest rate of 9%



The Rule of 72 is great because it provides a good approximation for annual compounding as well as compounding low rates of return (10% and under).

However, keep in mind the approximations lose their accuracy when dealing with higher interest rates. So when dealing with higher rates of return, it would be better to calculate this using the future value formula.

Well, that’s all for today. Short, Sweet, and to the point! I hope this Finance Friday’s Rule of 72 will help you step up your Financial Swag! 


Love You for Following,
G 

4 comments:

  1. I failed math, lol ;( Love your blog!

    www.msmadeulook.blogspot.com

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  2. This is petty useful! Thank you! Love your blog that it's not only about fashion but I can be smart too reading it:-)

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  3. I'm so glad you ladies like the Finance Friday posts. We need to stay fly and financially aware! Come back for more!

    7eventh Letter

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