The Intriguing Origin of the Rule of 72
Although the exact origins of the Rule of 72 are somewhat murky, it’s widely believed to be an adaptation of the Rule of 69, which was more rigorously accurate but involved a more cumbersome calculation. The Rule of 72 likely emerged as a more practical alternative, favored for its ease of use and decent approximation accuracy.
The Rule of 72 is believed to have roots in the early mathematics of investment dating back to the Renaissance period. Mathematicians and financiers sought simple methods to calculate the growth of investments, and the Rule of 72 emerged as a convenient rule of thumb that found favor among traders and early economists. Its simplicity and practical utility have secured its ongoing relevance in financial education and practice today.
Who Can Benefit from Using the Rule of 72?
Casual Investors
For those managing personal portfolios or retirement funds, the Rule of 72 offers an instant mental calculator to gauge when investments will double without diving into complex compound interest calculations.
Financial Educators
The simplicity of the Rule of 72 makes it an excellent tool for teaching basic investment and finance principles to students and newcomers to the financial world.
Economic Analysts
Professionals forecasting growth rates in economic scenarios, such as GDP growth or inflation, can use the Rule of 72 to provide quick estimates during analyses or presentations.
A Few Laughs Along the Wealth Path
Imagine you’re at a fancy dinner party and someone brags about their latest investment. You could whip out the Rule of 72 - and perhaps your mobile calculator, because who does mental math after two glasses of wine? Calculate on the fly how long until their investment doubles, and smoothly elevate the conversation from mere boasting to an informed financial discussion.
Who says finance can’t be the life of the party?
Related Terms
- Compound Interest: Earns or incurs interest on the interest generated from the initial principal.
- Simple Interest: Interest calculated only on the initial amount of money, not on accumulated interest.
- Annual Rate of Return: The percentage return achieved per year, including interest, capital gains, dividends, and distributions realized over a given year.
Further Reading
To brush up more on this fascinating subject and perhaps learn a few more party tricks, consider these books:
- “The Only Investment Guide You’ll Ever Need” by Andrew Tobias
- “A Random Walk Down Wall Street” by Burton G. Malkiel
- “The Little Book of Common Sense Investing” by John C. Bogle
Whether you’re doubling down on investments or your knowledge of financial wisdom, remember the Rule of 72 is your handy shortcut to understanding the exponential growth of money. Happy calculating!
