Monday, 7 March 2005

The rule of 72

Michael Barone has a column that would be better titled “The Rule Of 72”—not the one used for financial purposes, but the one I mentioned here. It’s an interesting read. Check it out.

(þ: Power Line)


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[Permalink] 1. John Wm. Hall wrote @ Mon, 7 Mar 2005, 11:41 pm CST:

Re “The Rule of 72… used for financial purposes”: Could you be talking about the Rule of 78s.This was an old (rip-off) method used by lenders, particularly commercial banks, to compute rebates of prepaid interest on installment loans. The name comes from the fact that 78 is the sum of the months’ digits in a year. Computations were made by summing the digits of the months on the loan and comparing them with the months for which payment had been made (I think this is close). The Rule of 78s was particularly harsh in enriching banks at the expense of people, usually of modest incomes, who’d borrowed to buy mobile homes. My impression is that Rule of 78s was discontinued some years ago. Never heard of a Rule of 72.

John in New Orleans



No. The rule of 72 is a rule of thumb to determine how long it takes for an investment to double. For instance, if an investment gets a 7% return, divide 7 into 72 and you get 10 (roughly). Therefore, the investment would double in ten years.

The same concept can be applied to inflation as well. A persistent 3% inflation rate can cut the inflation-adjusted value of the dollar in half in 24 years. A 2% rate would cut the inflation-adjusted value of the dollar in half in 36 years. And so forth.

[Permalink] 3. John Wm. Hall wrote @ Tue, 8 Mar 2005, 11:11 pm CST:

Thanks for setting me straight. Love it.

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