The Rule of 72 is a basic rule that each and every investor should know. The rule is commonly used to determine how many years will it take for your money to double.
The equation is simply this, 72 divided the interest rate equals the number of years it takes for your money to double. For more information on this you can read my blog post entitled “An audio visual presentation of the Rule of 72” and “The Magic of the Rule of 72” For a more practical application of the Rule of 72, read the blog post entitled “Want to get wealthy ? Think like the bank”
But the usage of the Rule of 72 is not only limited to investments. The Rule of 72 can also be used when it comes to managing debt wisely. The Rule of 72 could be written as follows:
72 / interest rate = number of years for your debt to double
By using this equation, you can take any debt you have with your credit card company or your mortgage lenders and determine how many years will it take for your debt to double.
As an illustration let us use credit card interest. In the Philippines, credit card companies charge about 3.5 % per month. This is about 42 % per month.
Using the Rule of 72, it is now possible for us to know that a credit card debt doubles every 21 months. (72 / 42 = 1.7 years or 20/4 months).
How does this information help us? Although the information is not entirely accurate since you will be paying off your credit card debt slowly, however this gives you an idea on how fast your debt is growing. Now that you are armed with the knowledge that your credit card debt doubles every 21 months, you would be more compelled to extinguish your credit card debts immediately !
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Is this the same idea that loan debt doubles also?
Steve: Yep, something like that