Einstein: The Rule of 72

Even back in the good old days when I was starting out I reused older material, good to see. It is important to figure out how long it will take to double your money, and how many DOUBLES you will need to reach your savings goals.

This is a rewording of a earlier posting on July 21st 2005. OK, so maybe I will concede that Einstein may have stated that this was important, but I am still not convinced he “invented” it, but be that as it may.

Doubling your investment

How long to Double Your Savings based on Interest Rates

If you click on the graph on the right you will find a gif that will show you a graph to show you the rule of 72 at work. Assuming your saving a set amount of money with only 1 compounding period per year, this graph is fairly accurate. The graph shows how simple the calculation can be, say if I can find an investment that gives me 36% growth a year, it would double in two year! Can I find that investment? No.

The other thing to remember is this is a DOUBLING period, and the more of those the better. Why? Remember if you find an investment that grows say by 10% a year (over year), your money doubles in 7 years (about), so in 21 years (approximately) your money will be 8 times what it is today! (remember 2 * 2 * 2 == 8). This is why it is so crucial to find good growth in your investments.

However, risk is another thing to take into consideration too, and we’ll talk about that soon as well.

The importance of the doubling period in investments cannot be discounted.

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Einstein’s Real Gift to Finance

Einstein Finance

This is a repeat, but a good article Einstein Finance , hope you enjoy…

Einstein FinanceNo, it is not E=MC^2, look at the mess that one has gotten us into.

I have read a bunch of places that Einstein was the first to quote the rule of 72. What is the rule of 72? OK, this one is really important for compound interest or growth, so pay particular attention to this one. If you have an investment M it and it is growing at a rate of G (compounded yearly) if you divide G into 72, that is how long it will take M to DOUBLE in value.

Some examples:

  • I buy a bond at 4% interest yearly growth (compounded), it will take 18 years for this bond to DOUBLE in value (i.e. 72 / 4 = 18 )
  • I buy a bond at 2% interest and it will take 36 years for this to double in value.
  • I leave my money in my bank account that pays 1% interest, it will take 72 years for it to double in value!

I don’t think I completely buy that Einstein thought this up, given that I have a math degree and this is just straight math, but let’s just say Einstein did say this, for now.

Find things that grow annually by 10% and your money will double every 7 years, which is really a good thing! Einstein Finance, a new term!

–C8j

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Einstein Finance ?

I did a few articles a while ago, and I will be pointing to them along the way, but what the heck did the man who gave us the Nuclear age (well one of the men then) have to do with Finance? Well let’s first look at one of my favorite quotes from old “wacky hair”:

Insanity: doing the same thing over and over again and expecting different results.

Albert Einstein,

Now what, you may well ask, does this have to do with financial planning, retirement planning, debt reduction, or any other financial art that I comment on? Everything!

How many times do you keep doing the same thing every month and hope that somehow your financial future changes? Have you changed anything at all? Then why do you expect different results?

  • If you make the same payments on your mortgage and the interest rate does not change, it would be insane to think it would get paid off any faster.
  • If you continue to use your credit cards and only pay the minimum payment every month, it would be foolish to think you would ever be able to pay them off.
  • If you continue to spend more than you make, how are you going to ever pay anything off?

Einstein may not have been speaking specifically about finances with this statement, but it is very applicable folks, remember he is the father of Einstein Finance .

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A Change In Lifestyle?

Yes, any kind of financial plan for investing and debt reduction is going to be a lifestyle change. Why not follow the father of Einstein Finance ?

How can I say that? How did you get into the situation you are in currently, that you are now creating a plan to get out of? Let’s ask Mr. Einstein what he thinks:

Insanity: doing the same thing over and over again and expecting different results.
–Albert Einstein

You cannot expect to change things, by doing the exact same things. Change is necessary and maybe should be embraced when you want good things to happen.

Don’t be afraid of a lifestyle change, it doesn’t have to be something big, it can be something simple. Don’t buy your coffee for a month, and see how much money you save. That really is a lifestyle change.

I know the importance of lifestyle changes to get where you want. I lost 80 lbs. about 3 years ago, and I have managed to keep it off. No it wasn’t easy, no it wasn’t fun, but I also realized, that I couldn’t go back to my old eating habits, if I wanted to keep the weight off. Don’t make me post a picture of me in a swimsuit BEFORE I lost my weight!!!

Remember this is from the man who started Einstein Finance !

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Rule of 72 (more Einstein Finance)

OK, so maybe I will concede that Einstein may have stated that this was important, but I am still not convinced he “invented” it, but be that as it may, otherwise the concept of Einstein Finance might have taken off.

If you click on the calculator picture on the right you will find a PDF file that will show you a graph to show you the rule of 72 at work. Assuming your saving a set amount of money with only 1 compounding period per year, this graph is fairly accurate.

The other thing to remember is this is a DOUBLING period, and the more of those the better. Why? Remember if you find an investment that grows say by 10% a year (over year), your money doubles in 7 years (approximately), so in 21 years (approximately) your money will be 8 times what it is today! (remember 2 * 2 * 2 == 8). This is why it is so crucial to find good growth in your investments.

HOWEVER, risk is another thing to take into consideration too, and we’ll talk about that soon as well.

Double, double, double!!! Einstein Finance a new and exciting idea?

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