So you can do a sudoku before your Cheerios get soggy, and calculating a 15% tip for a meal is a breeze, but what about compound interest? Calculating compound interest is one of those things that takes 30 seconds to accomplish on a financial calculator. This isn't hard - if you carry a financial calculator around with you. But a quick (and less dorky) alternative is to use the rule of 72.
Rule of 72
The rule of 72 can be used to figure out how long it takes to double your money given a growth rate. For example, at 12% you would calculate 72/12 = 6. So at 12% it will take six years to double your money. If you have $25,000 and you invest it at 12%, in six years the $25,000 will be approximately $50,000. The actual number is (1.126)*$25,000= $49,346. The rule of 72 calculation isn't perfect, but it's close.
Using the rule of 72 lets you estimate how many millions you will have at retirement, although finding the proper investment to give you that return is another story!
If you can remember certain pairs of numbers, it will make your calculations even easier. (From risky maneuvers to slow-and-steady strategies, we look at five methods to double your money in 5 Ways To Double Your Investment.)
|Pairs to Remember|
|Pair||Return||Time to Double|
|(2, 36)||2%||36 years|
|(3, 24)||3%||24 years|
|(4, 18)||4%||18 years|
|(6, 12)||6%||12 years|
A Second Use: "Back in My Day" Calculations
The rule of 72 can also be used to generally figure out what something was worth years ago. Imagine you were told a dozen eggs cost 60 cents 50 years ago. Using the inflation rate of 3%, the 60 cents would double every 24 years, so approximately twice over the 50-year period. The 60 cents would double to $1.20 then to $2.40. So, compared to today's average price of $2.20, this estimate suggests that the cost of eggs has actually gone down on a real basis.
Monthly Payments per $100,000 Mortgage
You can also estimate the monthly payment on a 25-year mortgage. What you need to know to do this is that you will pay about $700 per month for every $100,000 borrowed. So, on a $250,000 mortgage, the monthly payment should be about $1,750 (700 x 2.5).
If you are looking for a more exact estimate, just think about the number seven. A 7% mortgage will be $707 per month; for every 1% increase in interest, the monthly payment will go up by about $70. For every 1% decrease in interest, the payment will go down about $70.
|$100,000 Mortgage Payment (25 Year Period)|
So, if you buy a $300,000 house and the interest rate is around 6%, the monthly payments should be around $1,900 per month ($637 x 3). This is on a 25-year mortgage, so it will be a little less on a 30 year loan, but at least you'll have a jumping-off point. (When you have access to the internet, finding the exact monthly payment is easy, just check out our Mortgage Calculator.)
Breaking It Down
You will not use these calculations every day, but you will be able to make much more accurate financial calculations in your head. Whether tossing out numbers to back up an argument with a coworker, or attempting to evaluate a potential investment, knowing how to run the numbers in your head will give you a more accurate start. Then, you can dig out your financial calculator for the final analysis.
Mutual Funds & ETFsDiscover analyses of the top three California municipal bond mutual funds, and learn about their characteristics, historical performance and suitability.
ProfessionalsIdentify the key differences between a career in accounting and financial planning, and learn how your personality dictates which is the better choice for you.
Investing BasicsPlain vanilla is a term used in investing to describe the most basic types of financial instruments.
Investing BasicsIn specie describes the distribution of an asset in its physical form instead of cash.
EconomicsA company’s days working capital ratio shows how many days it takes to convert working capital into revenue.
EconomicsCross elasticity of demand measures the quantity demanded of one good in response to a change in price of another.
Personal FinanceMany employees blame office politics when they fail to get promoted, but they may be sabotaging their own careers with these behaviors.
Fundamental AnalysisWith a backdrop of armed rebels and drug cartels, the journey for the Colombian economy has been anything but easy.
Options & FuturesProfessionals choose the options available to you in your plan, making your decisions easier.
Fundamental AnalysisOptions market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
Regardless of whether cash dividends are paid or accrued, a company's working capital is reduced. When cash dividends are ... Read Full Answer >>
Prepayments, or prepaid expenses, are typically included in the current assets on a company's balance sheet, as they represent ... Read Full Answer >>
A company accrues unpaid salaries on its balance sheet as part of accounts payable, which is a current liability account, ... Read Full Answer >>
Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
Colombia meets the criteria of an emerging market economy. The South American country has a much lower gross domestic product, ... Read Full Answer >>
A profit and loss (P&L) statement, or balance sheet, is essentially a snapshot of a company's financial activity for ... Read Full Answer >>