May 19, 2004, 11:41 AM
The Rule of 72 that Austin can't seem to understand.
I learned a long time ago about the rule of 72. It is a simple formula to figure out how long it takes to double your money (see below). When the legislature passed a 10% property cap in 1997, I saw that the consequence of the bill would be to double the taxes on most homeowners in 7 to 8 years. I made my prediction that this would come to pass back in 1998. Sadly, I was correct. Property taxes have doubled in the last 8 years for most Texans. At the curent cap rate the average Texan will see their taxes double every 7 to 8 years.
I have tried to explain this basic math formula to our elected officials for years. They look at me like they never had a math class in their life. Recently in an interview on KSEV AM700, Senator Jon Lindsay said I was right on my predictions of taxes doubling every 7 to 8 years if my numbers were correct. If my numbers were correct? That is like saying the sun will come up if indeed the earth revolves around the sun. Facts and numbers don't lie!
It is no wonder our elected officials can't solve our problems. They don't even understand them.
I found these articles on the “Rule of 72” recently on Yahoo Finance.
The Rule of 72 is most commonly used to estimate the length of time it would take a beginning amount of principal to double, if it compounds at a given interest rate (typically, one less than say, 20%, as higher numbers tend to work less well). For example, principal at 6% will double in 72 / 6 = 12 years.
What's less well known is that the Rule of 72 is also a way for estimating retirement income. It shows, for a given rate of return, how long you must regularly invest a given sum in order to begin withdrawing that sum without dipping into principal. For example, if you invest 1000 USD per month at a 6% annual rate of return, then in 72 / 6 = 12 years, you could begin withdrawing 1000 USD per month from your portfolio without depleting your principal. In effect, so long as your funds continued to earn a straight 6% annual return, that 1000 USD per month could be your retirement income.(1)
(1) See Bogle, John, Common Sense on Mutual Funds (New York: John Wiley & Sons, Inc., 1999), p. 308. Note: extensive excerpts from this book are available in the Education section of the Yahoo! Finance Mutual Funds Center.
Rule of 72
Have you always wanted to be able to do compound interest problems in your head? Probably not, unless you're a sociopath, but it's a very useful skill to have because it gives you a lightning fast benchmark to determine how good (or not so good) a potential investment is likely to be.
The rule says that to find the number of years required to double your money at a given interest rate, you just divide the interest rate into 72. For example, if you want to know how long it will take to double your money at eight percent interest, divide 8 into 72 and get 9 years.
Interest Rate: %
Calculate
Years Required for Principal to Double
Exact Answer:
Rule of 72 Estimate:
(We're assuming the interest is annually compounded, by the way.)
As you can see, the “rule” is remarkably accurate, as long as the interest rate is less than about twenty percent; at higher rates the error starts to become significant.
You can also run it backwards: if you want to double your money in six years, just divide 6 into 72 to find that it will require an interest rate of about 12 percent.
Years to double
your investment
Calculate
Required Interest Rate
Exact Answer: %
Rule of 72 Estimate: %
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