Rule of 72
The Rule of 72 could be one of the defining moments of your life. Knowing about the Rule of 72 can get you interested in personal finance and investments. The rule of 72 is nothing but compounded interest expressed simply and mathematically.
The Rule of 72 will give you an quick ⚡ idea on how to double your money.
How you can use the Rule of 72 ?
If you divide the number 72 by the rate of interest, you get to know the number of years it will take for you to double the money. For example if the rate of interest is 9%, simply divide the number 72 by 9% and the answer is 8. Thus it will take 8 years to double your money if you invest at 9% pa. rate of interest.
We can use this rule in reverse too know the rate of interest needed to double your money to achieve your set goal
Eg: If you have 250k today and you need 500k in 5 years. Just divide the number 72 by 5, the answer is 14.41%. Thus you need a type of investment avenue, where you earn at least 14.41% p.a. as rate of interest/returns to double your investment amount in 5 years.
This ‘Rule of 72’ helps you to understand about inflation also. It helps you to calculate the amount of time it will take for inflation to make the real value of money half. Let’s say present inflation is 5.5%. When you divide 72 by 5.5% the answer is 13.09 years. That is to say, if you have 100k with you today, it would take around 13.09 years for the value of the money to be halved.
What you can learn from the Rule of 72 ?
- That money is like a fruit tree—Money is like a fruit tree, you cannot expect to plant something and get to eat its fruit the next day. It takes time for money to grow. The Rule of 72 teaches you that the more time you “compound” your money, the greater will be its return.
- That money does not grow on trees—This saying simply means that it takes effort in order for money to grow. The Rule of 72 teaches us that in order to get more out of our money, we must make an effort to get the highest interest rate and at the same time, make sure that we do not lose money in the process by engaging in risky investments.
- The importance of learning about interest—The Rule of 72 teaches us that the higher the interest rate, the lesser time it will take for you to double your money and the lesser time taken by your money to double, the more your money will grow.
- Make money work hard for you—Some people say that we should not work hard for money but that we should let money work hard for us. I definitely agree. There is no better way to financial freedom than to let money work hard for us. Unlike people, money doesn’t get sick, money doesn’t get tired and money doesn’t complain. Since the Rule of 72 is all about the concept of compounding interest, it demonstrates for us how money, when reinvested, begets more money.
- Money Makes Money—The Rule of 72 helps you understand a powerful concept in personal finance, the concept of passive income. Financial planners tell us that there are two types of income, active income, and passive income. In active income, you have to do something to get income; an obvious example of this is your day job. You have to be physically present and doing something in your day job in order to earn an income. For passive income you don’t have to do anything to earn an income. You just relax and wait for income to come. Passive income does not come automatically, you have to do something first and afterward, you will reap the benefits and just wait for income to come. An obvious example of passive income is interest income wherein your money earns money without you doing anything to earn interest. The Rule of 72 gives you a clear demonstration of what passive income is all about and how to double your money,
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