ANITA JOHNSON: Rule 72

sac-button-anitaOPINION – Have you figured out how many years it takes for the money you earn to begin to pay you? Basically what is the future value of the money of your investment; there is a simple calculation you can do to understand compound rates effect money. It is called “The Rule of 72.”

Simply, The Rule of 72 is the way to determine how long it takes your investment to double with a fixed annual rate of interest.  Formula: Divide 72 by the annual interest rate, which number will equal to the number of years it will take your interest to double.

I want to invest $10,000 at a rate of 3%.  Using the rule of 72; 72/3 gives me 24 years for my money to double to $20,000.

The Rule of 72 can also be used to calculate the effectiveness of inflation and expenses. Example: If I expect the rate of inflation to be 4% using the rule of 72 -72/4 gives me 18 years for the savings I didn’t invest to lose ½ its value.

 

Rate of Return

Rule of 72

Actual # of Years

2%

36

35

3

24

23.45

9

8.0

8.04

The Rule of 72 is a simple but not as precise as using the future value formula for calculating when your monies will earn money, make sure you consult with your financial and/or tax adviser before investing any money.

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By Anita R Johnson

Money Wisdom for Women

www.moneywisdomforwomen.net