Using The Rule Of 72 To Counter Debt
\”The most powerful force in the universe is compound interest,\” said Albert Einstein. It is expressed in a mathematical formula called the Rule of 72.
Although Einstein is best known for his theory of relativity, some declare that his discovery of the Rule of 72 is more important. Some skeptics however, declare that this rule had been known long before he was born. The majority nevertheless, believe that it was Einstein who popularized the rule.
One of the most basic rules that investors should know is the Rule of 72. This rule is used to determine how many years it would take for money to double.
The math is not that hard. You only have to divide 72 by the interest rate and it will equal to how many years it will take for money invested to duple. But the Rule of 72 is not only limited to determining investments but can also be utilized in debt management. Thus the rule can also be equated this way: 72 / interest rate = number of years for your debt to double
As you can see, the equation will also help you find out the time it takes for your debt to multiply itself twice. May that debt be incurred through credit card, loans or mortgage, the Rule of 72 will help you determine when your debt will double.
Let us make a case in point using credit card interest rates. Most credit card companies here in the Philippines have 3.5% interest rate that amounts to 42% interest in a year. Now we divide 72 by 42 and the resulting answer will be the amount of years it takes for your credit card debt to double. (72 / 42 = 1.7 years or 20/4 months).
How will this knowledge aid you? Though the computation is not precisely correct because we have not considered that you are also paying off your credit card debt at the same time, however, this knowledge will give you a notion of how quickly credit card debt grows. The knowledge that your credit card debt is multiply twice every 21 month will more than convince you to pay up quickly.
To learn more about the Rule of 72 visit the blog of Zigfred Diaz where he talks about other topics including debt management.
