The Rule of 72 is a great mental math shortcut to estimate the
effect of any growth rate, from quick financial calculations to
population estimates. Here’s the formula:
Years to double = 72 / Interest Rate
This formula is useful for financial estimates and understanding
the nature of compound interest. Examples:
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At 6% interest, your money takes 72/6 or 12 years to double. |
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To double your money in 10 years, get an interest rate of 72/10 or 7.2%. |
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If your country’s GDP grows at 3% a year, the economy doubles in 72/3 or 24 years. |
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If your growth slips to 2%, it will double in 36 years. If growth increases to 4%, the economy doubles in 18 years. Given the speed at which technology develops, shaving years off your growth time could be very important. |
You can also use the rule of 72 for expenses like inflation or interest:
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If inflation rates go from 2% to 3%, your money will lose half its value in 36 or 24 years. |
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If college tuition increases at 5% per year (which is faster than inflation), tuition costs will double in 72/5 or about 14.4 years. If you pay 15% interest on your credit cards, the amount you owe will double in only 72/15 or 4.8 years! |
The rule of 72 shows why a “small” 1% difference in inflation or
GDP expansion has a huge effect in forecasting models.
By the way, the Rule of 72 applies to anything that grows,
including population. Can you see why a population growth rate
of 3% vs. 2% could be a huge problem for planning? Instead of
needing to double your capacity in 36 years, you only have 24.
Twelve years were shaved off your schedule with one percentage
point.
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