I used to be incredible at math. My Economics coursework in college was filled with so much Calculus that my dreams were filled with differentiation and derivatives rather than drunken divas. Isaac Newton used to text me frequently to see what I thought about his laws. But that was the old me. The new me is so reliant on my calculator I feel paralyzed and naked without it. Watching me on a calculator is like watching a teeny-bopper text her BFF, lol.
When I don’t have a calculator within reach, there are still a few calculations I manage to do in my head. Although extremely simple, the following rule will knock the pants off of any listener (excluding teeny-boppers and financial advisors).
The Rule of 72
One thing that makes investing so beautiful and credit cards so ugly is compound interest. I will have a later post devoted to compound interest, but for now just remember that compound interest is “interest on interest.” For one to calculate compound interest, one would need the formula for Future Value:
FV = P(1+r)^y
Instead of having to carry that Y in your head, try this:
The Rule of 72 says to find the number of years required to double your money at a given interest rate, you just divide the interest rate into 72. It’s amazingly accurate:
- 2% = 36 (actual 35 years)
- 3% = 24 (actual 23.45 years)
- 9% = 8 (actual 8.04 years)
The Rule of 72 is not as precise at higher interest rates. Thankfully, thanks to Ben Bernanke, we have nothing to worry about. The Rule of 72 works for tax-deferred investments with a fixed rate of return, compounded annually. If you want a more accurate (taxable investment) figure, try using the Rule of 108.