Canadian Personal Finance Blog

The key to the rule of 72 is that it is describing how long it takes your money to double. The shorter the period, the more doubling periods you will get over a long period of time (if you double click on the graph beside you will see what I mean).

If you look at the table below you can see what happens if you can actually get your investments to give you 7% or higher growth every year:

So as you see if you can get your investments to pay 10% a year somehow, your initial
investment will have grown by 45.3 as a multiple. That means if you invested $1000 (and never added to the principle), forty years later you would have $45,300 , not bad eh? Of course if you could find something that paid 20% that same $1000 would be worth $1,469,800 , but who could find something that pays that much (unless you were running a pay day advance company).

This is a rewording of a previous 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.

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 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!!! –C8j

Einstein Finance

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

No, 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

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 .

My post about credit cards made it into the Carnival of Credit Cards posted on Credit Card Low Down, go have a peak.