The Financial Rule of 72
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You have learned that the law of compound interest has the ability to turn small debts into massive ones. That is one side of the coin, but there is another one. Compound interest has the ability to turn your investments into even bigger ones, too! The “Rule of 72” or what I like to call it, the financial rule of 72 is interesting because it allows you to calculate how soon it will take you to double your investment. To do this you must know the interest rate offered. If you know you can earn 12% per annum on an investment, how long would it take to double the investment? This is a simple calculation. All you have to do is divide 72 by the rate of interest. In this case the rate is 12%. 72¸12= 6. It will take 6 years at that rate for you to double your money. That’s not too long is it?
Double your investment
It is a very sound goal to aim to double any investment you make. You can use the rule of 72 if this is your goal. You know your capital sum and you have a time frame in mind to achieve the goal. You will have to know what sort of % return you will have to secure in order to meet the goal. You have $12,000 saved up and you want to be able to put a down payment of $25,000 on a house in four years. Divide 72 by 4 and you will find the answer is 18. Thus you will need to find an investment that will pay 18% to get to this objective. It’s a high rate, so be careful as it might be risky. I don’t think your bank will be able to help you on this, so you will need to look at stocks and shares or gold coins.
Use the Financial Rule of 72 in many areas
This is a very useful rule to know in many areas of financial planning. You can use it to calculate debt as well. If I take out a mortgage at 6 % interest how many years will it take to cover the capital price of the house? It will take you 12 years. The rest is interest and you have 18 years to clear it. Traditionally house prices have risen by 4% per annum. In the last few years we have witnessed a housing bubble where house price increases have reached a staggering 37% per year. The market has crashed and there will be a period of adjustment where we return to more traditional increases. In 12 years in normal circumstances you can expect your house to have increased 36% in value. That’s probably a good time to take your profits, look for a bargain and start all over again. If you are starting out now and can get finance, you will find a lot of distressed property on the market. Most of it will be selling at knockdown prices, so you will most certainly find a bargain if you look. Your Real Estate Agent buys from this pool and will not be eager to share with you unless you are good friends.
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