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72 is the Magic Number of Personal Finance

Also know as "the rule of 72" in finance parlance.

72magicians hatThis rule is worth remembering as all you need to do is a quick calculation (mentally if you can remember your primary school math tables) and you can verify, if the cheeky agent is giving you hogwash.

72 helps you answer some fundamental finance related questions.

How Many Years?

If you divide the number 72 by the rate of interest, you'll get the number of years it will take for you to double your money. For instance, if the rate of interest is 9%, simply divide the number 72 by nine, the answer is eight. This is the number of years it will take to double your money if you invest it at a 9% rate of interest.

What Interest Rate?

This rule works in reverse order as well. Lets say, you know the number of years you want to double your money in, and want to know the minimum rate of interest which you need to earn to achieve that goal. So let's say, you have $25,000 today and need to fund your son's university education with $50,000 in five years. Just divide the number 72 by five and the answer is 14.4%. This shows that you will need to invest your money in an instrument where you earn at least 14.4% as the rate of interest, if you want to double the funds in five years.

How does Inflation Affect It?

This rule also helps you understand a thing or two about inflation. It helps you calculate the amount of time it will take for inflation to make the real value of money half. So, lets say that the average rate of inflation is 7%. When you divide 72 by seven, the answer is 10.28. So, if you have $250K  in your savings today, it would take just over ten years for the value of your money to be halved.

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