The Rule of 72, 114, 144
- 5 Comment
I am more aggressive with my investments since I day trade in addition to investing in alternative investments. I’m either lucky over 10 years or I’m good. Either way my broker is happy for it.
As an aggressive trader, I always plug away at numbers in my head. I’m almost ashamed to say I have a calculator by my bed. One of the things I always keep my eye on is how fast my money is growing. Also I estimate from time to time how long some of my risk capital will double, triple, or even quadruple. To do so, you don’t have to have 99.99% accuracy. That’s where the “Rules” come in.
The Rule of 72
You may be familiar with the Rule of 72. This formula can be used to estimate how long it will take to double your money based on an interest rate.
Example:
You expect to get an 8% return on your money. How long would it take to double your money based on that interest rate? To estimate, simply divide 72 by 8 and you will get 9 years.
The formula is fairly accurate for estimating.
| Interest Rate | Period to Double |
|---|---|
| 4% | 18.0 years |
| 5% | 14.4 years |
| 6% | 12.0 years |
| 7% | 10.3 years |
| 8% | 9.0 years |
| 9% | 8.0 years |
| 10% | 7.2 years |
The formula is most accurate between 5 and 9 percent. Above and below it is less accurate, but still useful for estimation.
The Rule of 114
The Rule of 72 is great for estimating how long it takes to double your money, but what if you are more ambitious and want to triple it? That’s when the Rule of 114 comes in. Divide 114 by your expected interest rate. Using the 8% return figure from the first example, we would calculate it as 114 / 8 = 14.25 years.
| Interest Rate | Period to Triple |
|---|---|
| 6% | 19.0 years |
| 8% | 14.3 years |
| 10% | 11.4 years |
| 12% | 9.5 years |
The Rule of 144
To estimate how long it will take to quadruple your money, you can use the Rule of 144.
| Interest Rate | Period to Quadruple |
|---|---|
| 6% | 24.0 years |
| 8% | 18.0 years |
| 10% | 14.4 years |
| 12% | 12.0 years |
Time Value of Money
These 3 rules underscore the concept of the Time Value of Money. Time value of money simply states that money received today is worth more than the same amount received in the future. The core principle of finance holds that if money can earn interest, an amount of money is worth more the sooner it is received. The current value is called Present Value or Present Discounted Value.
Time Value of Money is useful for financial planning for things such as retirement and college financing. If you remember anything remember, a dollar today is worth more than a dollar tomorrow.
5 Comments on this post
Trackbacks
-
max said:
Wow, you have some interesting invesment articles. Thanks for the ideas.
If you need a free page on EntreWiki, you can get one for writing just one blog post or put our buttons. http://entrewiki.comDecember 17th, 2007 at 6:44 am -
Mike Huang said:
Interesting post, great read of the day I might say. Keep up the good work!
-Mike
December 17th, 2007 at 6:15 pm -
Hock said:
Great post. As an investor myself, these numbers are good to keep at the back of my head. Thanks for the reminder.
Is your blog income providing significant cash flow for your investing activities?
December 18th, 2007 at 9:11 pm -
Dax Desai said:
@Hock – No my blog income is marginal. My investing is more day-trading usually 3 days/week.
December 20th, 2007 at 10:49 pm
[...] on August 26, 2008 by saase For this spender, there is one real turn-on about saving, called the time value of money. This is the amount of time it takes for invested funds to double (triple, quadruple, etc.), based [...]