We all want to make money or get rich quickly. I personally believe that if you want to get rich quickly it will require tons of hard work and enormous good luck.

However, if you do not have the charaterstics or persistence of a hard working individual, it does not mean that you are sheer out of luck either. Have you heard of the rule of 72?

The rule of 72 is also called the “8th wonder of the world” by Albert Einstein and it basically have to do with compound interest. The rule of 72 states that if you divide the interest rate into 72, that number represents the amount of years it will take for your money to double.

For example, currently the banks pay about 4% interest rate on a one-year maturity CD. Let’s say that year after the year you renew your CD with the same amount plus any interest that’s earned, according to the rule of 72, your original CD amount will double its value in 18 years (72 divided by 4).

Let us say that you are putting your money into a 12% interest rate return investment, it will take 6 years for your original investment to double (72 divided by 12). Now, the the rule of 72 is only an approximation. Let’s see how the number works out to this theory.

Take, for example, a $1000 investment earning 12% yearly rate of return.

Your investment at the end of the 1st year will earn $120 in interest ($1000 * 12%). You then reinvest $1120 for the 2nd year earning 12%.

Your investment at the end of the 2nd year will earn $134.40 in interest ($1120 * 12%). You then reinvest $1254.40 ($1120 + this year’s interest of $134.40) for the 3rd year earning 12%.

Your investment at the end of the 3rd year will earn $150.53 in interest ($1254.40 * 12%). You then reinvest $1404.93 ($1254.40 + this year’s interest of $150.53) for the 4th year earning 12%.

Your investment at the end of the 4th year will earn $168.59 in interest ($1404.93 * 12%). You then reinvest $1573.52 ($1404.93 + this year’s interest of $168.59) for the 5th year earning 12%.

Your investment at the end of the 5th year will earn $188.82 in interest ($1573.52 * 12%). You then reinvest $1762.34 ($1573.52 + this year’s interest of $188.82) for the 6th year earning 12%.

Your investment at the end of the 6th year will earn $211.48 in interest ($1762.34 * 12%) on top of your investment of $1762.34 for the 6th year, brining your total investment return to $1973.82 for 6 years earning 12%.

As you can see, the rule of 72 is a quick way to determine when your money will double with an assumed rate or return.

Tags: Personal Finance