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.