If you are into stock market investing, you probably would have come across a term called “Rule of 72”.
Rule of 72 is a metric used to find out how long it takes to double the investment at a fixed rate of return.
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The time frame to double the money varies based on the interest generated from invested capital. Usually, the interest range falls from 25 % per annum to 8 % per annum from a broader perspective.
Rule of 72:
|Quotient||Interest rate||Years to double|
Here is the calculation: If a 100 dollars invested at fixed rate of interest 12 percent, it would take 6 years to double.
Rule of 72 = 72/interest rate = Years to double.
Eg: 72/12 = 6 years.
So simple & great isn’t ! Though rule of 72 is an approximate measure , it gives a fair idea of how much time taken to double the money. It gives a ball park figure, saving you from using calculators.
When your money is double every six year, you are allowing it to compound. The more time you give, with more forcibly it grows.
As the interest rate goes higher, time take to double the investment becomes lesser.
Then Why in the first place did I say “Rule of 72 is double edged sword” ?
Rule of 72 works for on your favor when you do activities like investing. That’s awesome!
But imagine when “Rule of 72” works against you? How terrible it could be?
Yes, it can go against you when you do activities like overspending, credit card , high interest loans etc.
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When you spend every time out of your way or control, there is a huge opportunity cost. Plastic money is designed to make your brains feel to avoid the pain which caused while spending in cash. Research study says that people who use cash to spend less than 40 percent than plastic money spenders.
Try using cash to spend and less of plastic money, you will see the results.
When you use your credit card for online shopping, latest gadgets etc. the average credit card interest rate as on 2022 is whopping 20.66 per cent. If you keep using your credit cards & paying the interest , it would take less year than 3.6 years for credit card companies to make you pay double the amount. how much money does the credit card companies make out of interest from you alone.
They generates sizeable income from loan interest. They are adhering to Rule of 72 & making it work against the gullible masses. Why would they even give a loan to stranger like you & me without any great competitive advantage for them.
That’s one of the reasons consumer loans are profitable & we keep getting calls , offers on various platforms.
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High Interest loans:
If your in Debt with car loan or mortgage with high interest rate , look into the possibility of refinancing to get a loan interest rate.
“Rule of 72 ” is practical eye opener and it helps you make more informed decisions in major money decisions.
If you understand and apply into your own personal finances , you can avoid falling into promotions, gimmicks of credit card companies, move away from opportunities that doesn’t give you an advantage, pay off the debt which takes forever to pay off. It simply makes you wise!
Thanks for reading! Happy investing.