Rule of 72
How Fast Does Money Double
How quickly money doubles depends on the interest rate. To get an estimate, divide 72 by the interest rate percentage. For example, if the interest rate is 1%, it would take 72 years for $1,000 to double to $2,000. However, if the interest rate is 6%, it would take only 12 years for the money to double. If the interest rate was 12%, the money would double every 6 years.
This information is important because banks use customers' money to make loans and earn interest, but they may not give customers higher interest rates in return.
For example, at a 6% interest rate, the bank could earn the amount owed to the customer in 12 years and keep the extra interest earned.
At a higher interest rate like 12%, the bank could earn a lot more than what is owed to the customer.
This formula is used to help you to get a rough idea of how fast your money would double using different interest rates. The larger the interest rate, the "Rule" would increase to get a more precise measurement (example rule of 73...).
A look at an actual example of how it works:
If your bank is giving you 1%:
72 (rule) divide by 1 (1%) = 72
What does that mean? If you place $1,000 in your bank (leave it there) and are receiving 1% interest, this means it will take 72 years before your money would double to $2,000.
What if the money earns 6% (most people won't get this which is why I am illustrating what the bank will earn),
72 divided by 6 = 12.
So the money would double every 12 years.
In year 12 the money would double to $2,000
The bank owes you $2,000 in 72 years but they have earned it in year 12 at 6%. Let's continue to year 72 when they owe you the $2,000 and see what they have earned. In 12 more years (which is 24 years since you placed the $1,000 in the savings), it would double again from $2,000 to now $4,000.
Year 36 (12 more years) = Doubles again to $8,000
Year 48 = $16,000
Year 60 = $32,000
Year 72 = $64,000
Why is this important?
They earned $64,000 and only owe you $2,000.
What if they could get 12%?
72 divided by 12 = 6
Year 6 = $2,000 (which they owe you in year 72)
Year 12 = $4,000
Year 18 = $8,000
Year 24 = $16,000
Year 30 = $32,000
Year 36 = $64,000
Year 42 = $128,000
Year 48 = $256,000
Year 52 = $512,000
Year 58 = $1,024,000
Year 62 = $2,048,000
Year 68 = $4,096,000
Year 72 = $8,192,000
and they only owe us $2,000 WOW!!!
I know some will say, but 12% doesn't exist. Really!!! What are you or others around you paying on their credit cards (in a lot of instances over 20% interest)? So it is not that it doesn't exist, you and I are just not getting it. Now divide 72 years by 20% and it is roughly 3 and 1/2 years. Do that math. No better yet, don't do it because it would make you sick.