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Rule of 72 with a twist

July 28th, 2007 at 11:56 pm

So I taught lawyer friend about the rule of 72 a couple of days ago. (Look, he had lawyer training not math!) I'm sure I'm singing to the choir here about it, but as a rule of thumb it states that:

You can expect an investment to double when the percent of return x the number of years = 72.

Examples are -

If you are earning 8% on an investment, it will take 9 years for the investment to double.

If you have to double your return in 6 years, you have to earn a yearly return of 12%.

Big Grin It'll take a lifetime for your checking account at 1% to double.

Exciting, when you first think about it! But the twist that I thought of last night was that the rule of 72 is double edged. It works, unfortunately, with anything with an interest rate on it.

So if the inflation rate is a consistent 3%, it will only take 24 years for your cost of living to double. It means that that 22K that I made when I first got out of college in 1984 and that 44K that I make now spend about the same. Depressing, isn't it?

It also means that if you owe 10K on a credit card at 10%, and you make the minimum payment at 2%, 9 years from now you should owe 20K, more if you actually charged something else. Assuming no fees, hah hah.

You've got to work hard to make the rule of 72 work for you - it works hard against you most of the time.

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