Ever faced a financial services agent who promised you a (X %) rate of interest on your investments and double the funds in (Y) number of years? To verify, if he is telling you the truth or purely bluffing isn't rocket science, it's harder. You will have to battle excel sheets to know the real answer. Or, look for a financial calculator and first figure out how on earth it works, and which mode you should choose - begin or end. (If you don't know what that means, never mind.) Of course, you could log-on to the net on your mobile and try to punch in the details on an online calculator website. You could do all of the above mentioned things or simply use the magic number 72.
72: is sort of a magic number of personal finance, a.k.a known as the rule of 72 in personal finance parlance. All you need to do is a quick calculation (mentally if you know fifth grade math tables) and you can verify, if the cheeky agent is giving you hogwash.
Years: If you divide the number 72 by the rate of interest, you get to know the number of years it will take for you to double the money. For instance, if the rate of interest is 9%, simply divide the number 72 by 9% and the answer is eight. This is the number of years it will take to double your money if you invest it at 9% rate of interest.
Interest: This rule works in reverse order as well. Lets say, you know the number of years you want to double your money in and want to know the minimum rate of interest which you need to achieve that goal. So let's say, you have Rs 2.5 lakh today and need to fund you sons college education with Rs 5 lakh in five years. Just divide the number 72 by 5 and the answer is 14.41%. This shows that you will need to invest your money in an instrument where you earn at least 14.4% as rate of interest, if you want to double the funds in five years.
Inflation: This rule also helps you understand a thing or two about inflation. It helps you calculate the amount of time it will take for inflation to make the real value of money half. So, lets say that the average inflation is 7%. When you divide 72 by 7, the answer is 10.28. So, if you have Rs 1 lakh in your kitty today, it would take around 10.28 year for the value of the money to be halved.
Keep in mind, that this is a rule of thumb and can be used to get a rough results on money related calculations. Now that you know a little more about the number 72 and its rule, use it while dealing with your agents for quick verifications of facts. If nothing else, you can always impress your girlfriend or boyfriend with this info.
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Updated Date: Dec 20, 2014 19:20:58 IST