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.
While Albert Einstein is really more popularly known for discovering the theory of relativity, some people say that the Rule of 72 is his more important discovery. The Rule is said, however, to have been in existence long before Einstein was born. The general consensus is that Einstein made the rule popular.
So what is the Rule of 72 ? Why is it considered a basic rule that every-want-to-be-investor should know. The Rule of 72 allows you to determine when money would duple and how many years would it take to do it.
To find out how this rule works, simply divide 72 by the interest rate and the result of that calculation is the amount of years it will take for your money to double. But this rule is not limited to knowing where you need to invest but can be also used to counter debt. The equation of the Rule of 72 is rewritten below: 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.
To illustrate my point, let’s use the interest of a credit card. Credit card companies here in the Philippines charge around 3.5% interest per month or about 42% interest per annum. Now divide 72 by the interest rate (42) and you will notice that your credit card debt multiplies by 2 every 21 months. (72 / 42 = 1.7 years or 20/4 months).
So how will this help you? Even if the information above is not as precise since you will probably be paying some of your credit card debt, however, our illustration shows just how much credit card debts grow so fast. Now knowing that your credit card debt doubles every 21 months, you will be more convinced to pay up your credit card debt as soon as possible.
To learn more about the Rule of 72 visit the blog of Zigfred Diaz where he talks about other topics including debt management.
