The Rule-of-72
Calculate Simply Compound Interest.
Rule-of-72 The Rule of 72 provides you with the ability to quickly and quite accurately calculate compound interest.
Calculating compound interest is a useful skill to help you determine the potential returns of an investment and accordingly how good of an investment this is. The rule says that to find the number of years required to double your investment at a given interest rate, you divide the interest rate into 72. For example, if you want to know how many years it will take to double your investment at 8% yearly interest:
Divide 8 into 72 and get 9 years. Interest can be compounded annually, monthly or even daily.
The shorter the period the higher the return.
We are assuming the interest is annually compounded for the rule of 72.
The rule is quite accurate up to about 20% interest.
The accurate calculation for the previous example is 9.01 years for the annually compounded interest.
For a monthly compounded interest it is only 8.78 years.
For a daily compounded interest it is 8.76 years. When you take a loan, the bank generally calculates your compound interest daily. That way you pay a higher premium.
But when you open a savings account, your interest is compounded yearly, sometimes monthly if the banker is in a good mood.
You should shop around and get the best offer taking into account the period of the compounded interest. Here is a Financial calculator to help you in your financial compound interest mathematics, compliments of www.moneychimp.com
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