The Rule of 72: Doubling of Money

When investing or borrowing money, probably the most determining factor in our decision is the interest rate we are paying, or getting, on our money. As discussed before, there are 2 types of interest: Simple Interest and Compound Interest. Simple interest, as its name suggests, is very simple to calculate. Compound interesting, however, can be a little more difficult.

The great Albert Einstein had come up with a concept called the "Rule of 72". This shows, by the compounding effect, how long it will take your investment or debt to double. What you do is divide the interest rate you're getting on an investment, or the interest rate you're paying on you're debt, and divide that into 72. The resulting # will give you the approximate time it will take for the money to double.

For example: If you're receiving 4% return on your investment, that means that if you held that investment, then every 18 years your investment will double (72 divided by 4 = 18).

Let's take a look at at a few different numbers and see what the difference could be.



As you can see, the potential difference is in the outcomes is astounding. Now, you have to ask yourself, where can you get these type of potential returns? If you look at the above example, the first rate of return of 4% is something you can't really even expect from a GIC, but lets just assume the bank gave you that on your GIC. After 36 years the difference is $600,000, which is potentially what the bank made off of you.

The highest rate of return on the example is 12%; which is probably the average return the bank will get from the money you invest with them (the bank doesn't just take your money and put it into a vault with your name in it, they take your money and re-invest it to make more money). Just think about your credit cards, what sort of rate do you pay? 18%-19%? So, think about it, they're giving you 4% on your investment, and they're charging you 18% on your credit card. Does that seem fair?

Why not do something smart with your money and invest yourself, rather then let someone else make money off of you. Now, there aren't many places you are likely to get average of 12% return, but over time, if you're invested in the market, the chances for getting better then 4% are a lot more likely.

The key is to do your homework, and let your money work for you. Let the compounding affect and rule of 72 work in your favour. If you have any questions, please do not hesitate to contact me. I hope you've learned something from this post!