The Rule of 72

In finance, the Rule of 72 is a fast way of estimating when an investment will double. You simply divide 72 by the interest rate to get the number of compounding periods. For example, if you would like to know how long your P100,000 will become P200,000 at an annual interest rate of 6%, simply divide 72 by 6 which gets you 12 years. At an annual interest rate of 8%, divide 72 by 8 and your money will double in 9 years. At an annual interest rate of 9%, divide 72 by 9 and your money will double in 8 years.

So how is this information useful to you? Consider the interest rates offered by banks for savings accounts in the Philippines. BDO and BPI are both offering savings accounts with an interest rate of 0.5% per annum. Using the Rule of 72, 72 divided by 0.5 will give you 144 years! Even with a time deposit account, you could get a rate of 4% which means your money will double in 18 years. Based on these projections, don’t you think you would be better off placing your money somewhere else?

Ok, this rule is useful, but, why do we use 72? The value 72 is a convenient choice of numerator, since it can be divided by 1, 2, 3, 4, 6, 8, 9, and 12 and it provides a good approximation for annual compounding at rates from 6% to 10%. At higher interest rates, the approximation using the Rule of 72 is less accurate. Nonetheless, remembering this rule will help you easily estimate how soon your investment or savings will double given a particular interest rate.

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