72 the magic number

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In finance, the rule of 72 is a method to estimate the time of doubling of capital. C´EST a major calculation to know.

In finance, the rule of 72, c´est a quick and simple calculation method that allows d´estimer the number of years required to double your capital. Simply take 72 and divide by the interest rate.

The rule of 72

In finance, the rule of 72 is a method to estimate the time of doubling of capital. In d´autres terms c´est the time needed to double a sum.
The number of years required to double your capital is therefore roughly equals 72 divided by the interest rate.

72 double capital

Note qu´ each time we double the starting capital of the previous period. There are geometric manner and non-arithmetic way. Simplifying this implies therefore that l´on has 100 / 200 / 400 / 800 / 1600 and non-100 / 200 / 300 / 400 / 500

So, for example, if you invest €100 with compound interest (c´est to say interest must be added to the original amount) of 9% per year, the rule of 72 shall apply:

72 / 9 = 8 years. It takes so 8 years to double your money

A rule to use only if the rate is known



If capital is placed with a t % interest rate per period (typically, years), it takes 72/t periods to dub it.

At 4% per annum, it takes 18 years, 6% it takes 12 years…

This rule dates back to the Renaissance. 70 would be more realistic, but 72, slightly pessimistic, promotes mental arithmetic.
It must for example 72% / 2% or approximately 35 years at 2%, but only 72% / 7% or approximately 10 years at 7%.
7%, capital goes from € 10 000 to € 20,000 in ten years, and then double again (from € 20 000 to € 40 000) the next ten years, and thus worth €80,000 after thirty years. In 35 years, the gain is therefore of more than 85 €000 7 per cent, against barely €10,000 to 2%. 20% your capital double about every 4 years.  Accept a placement of 10000-20% doubling is that the sum is: 10,000, 20 000, 40 000, 80 000, 160 000, 320 000, 640 000, 1 280 000 in 28 years that says the fortune of some, put your son (or grandson) EUR 10 000 at birth (Yes this n is not obvious) to 30 years the latter is millionaire (, admitting having 20% of performance)…

The rule of 72 helps therefore to answer two questions: the rate needed to double its capital and the time it will take.

Table of number d´annees necessary to double capital

% yield 72 divided by the number of years Number of years
0.75 (the libretto was in 2015) 72 divided by 0.75% 96
1% 72 divided by 1% 72
0 g 72 divided by 2% 36
3% 72 divided by 3% 24.0
4% 72 divided by 4% 18.0
4 D 72 divided by 5% 14.4
6% 72 divided by 6% 12.0
7% 72 divided by 7% 10.3
8% 72 divided by 8% 9.0
9% 72 divided by 9% 8.0
10% 72 divided by 10% 7.2
11% 72 divided by 11% 6.5
12% 72 divided by 12% 6.0
13% 72 divided by 13% 5.5
14% 72 divided by 14% 5.1
15% 72 divided by 15% 4.8

 

As you can see, a single contribution of €10,000 double 4 times faster to a return of 12% to 3% yield.

There is still that the libretto has n´a no meaning. 96 years are needed to double the value of the top capital c´est more qu´une life.

J did a simulation with rather safe assumptions (3% d interests of 2% inflation). After 10 years, the gain value is only 21%, is really not huge and this allows to realize that if low interest essentially to protect its capital, but in no case this is a good way to get rich.

 But what is the key to success?

Start early to save and invest in the performance now to maintain his standard of living in retirement. The time is the second key of compound interest. This rule perfectly illustrates what most personal finance sites encourage you to do so. Start early! More we begin to save and put money aside early in his life, more quickly your money will be able to grow to eventually double, triple or even quadruple…

In your life, how many are there periods during which the value of your money double?

Let's say your 30 years (time d´avoir a capital) at age 65 (your retirement and still I am very nice) so you have 35 years. Question is then how many times can double your money in 35 years?

However if you put l´argent in your children they may earn 25 to 30 years and capitalize for 65 years, or widely enough to grow this money (but do not place on A libretto for children, this n´a no meaning).

Second use of the formula

The rule of 72 can also be used to illustrate the power d´erosion of inflation. Especially useful for people who are approaching their pensionable. Thanks to this calculation you can estimate the number of years it will take before the cost of living double. Or, more clearly, how long it will take before your purchasing power decreases by half.

Remember that the inflation rate is the rate of increase in the price of goods and services for an individual over time. If the inflation rate is 5% and it remains constant for future years, this means that the prices of goods and services will increase at a rate of 5% per year. Compare with increases in the minimum wage of 1.5% to 2%. Realizes quickly qu´´au thread time is lost money.

Specifically, suppose that you are retired and anticipated an inflation rate of 5% per year for the next few years. Thanks to the rule of 72, simply divide 72 by 5 and this will provide an estimate of when the cost of living will double, which equals an approximation of 14 to 15 year olds (72 ÷ 5 = 14.4, shown in pink on the table).

To be more exact it just remove the 5% average rate of your pensions upgradings, admit 2% annual. Therefore, calculation using 3% so 72/3 24 years, knowing that the it does not move your own expenses (more on aged more expensive health).

Conclusion:

The rule of 72 is going to make you aware of the value of time and interest. Playing on the two tables, you can easily make a fortune (see curve below.)

This curve represents the gain of compound interest
This curve represents the gain of compound interest

 

 

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