(In case you are confused by the headline: a principle is a rule, and pollex is an obscure term for thumb. Therefore, we’re talking about Rules of Thumb.)
In this installment of our ongoing Principles of Pollex series, we’re going to talk about two Rules from the financial world that are actually real, true, undisputed Rules, rather than the guidelines with dubious proof that we’ve talked about before. These two Rules are not open to interpretation. The first is about investments, and the second is about loans. Both are useful in their own ways… Rule of 72
The Rule of 72 is a quick and easy way to determine when an invested amount will double in value, given a particular fixed rate of return. Please take note that this only works with a fixed rate of return. The actual formula is as follows:
72/R = Y (where the divisor R = the fixed rate of return and result Y = the number of years to double the value of an invested amount)
So, if you were to invest $1,000 at a rate of 4%, 72 divided by 4 equals 18. Therefore it would take 18 years to double in value to $2,000 at the fixed rate of 4%.
Another way to use this formula is to determine the fixed rate of return that you would need to achieve in order to double the value of an investment within a particular known timeframe. This is possible because the formula can be rewritten as 72/Y = R as an equivalent.