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Albert Einstein's Greatest

The Magic of the Rule of 72
Discovery: The "Rule of 72" Albert Einstein: One of the Most Influential Men of
Our Times!
L.E. Duncan, Yahoo! Contributor Netw ork The Best Quotes by Albert Einstein
Dec 12, 2006 "Contribute content like this. Start Here."
Who was Albert Einstein?
AFI's Greates t Divas in Film History
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The Greatest Job
“According to him this, not E=mc 2 was his greatest discovery, “Compound interest was not only
man’s greatest invention, but it was also the most powerful force on Earth!” Those are compelling
words coming from one of the most intelligent
men of our time!”
GE Finance
All types of loans available Apply (The Motley Fool).
Now! The explanation of compound interest is a simple
www.ge m on ey.in/htm l
one. When you invest money, you earn interest on
your capital. In the next year, you earn interest on
your capital and the interest you earned the year
Earn Fast Money
Learn Our Trading Application & Earn before. Now this principle applies to any type of
by Trading Online. Open A/C! investment, debt repayment and the effects of the
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inflation rate on your buying power.
Compound interest is not commonly understood.
Most feel that it is a lot of mathematical magic, and
are unable to determine exactly how they can make their money work harder than they do. We
simply determine how powerful this compound interest is by using the “Rule of 72”. By using this
rule, you can fairly accurately determine how long it will take to double your money (or your debt) at
a given interest rate. The rule is simple, divide the number 72 by the interest rate you are receiving
(72/10=7.2), and you will find the number of years it will take to double your money. It is called the
rule of 72 because at 10% interest, the money will double every 7.2 years.
You can also compute an interest rate if you are told that your money will double in “so-many” years.
For example, if you needed to double your money in two years, and you would be able to figure that
you would need to earn 36% interest (72/2 (years)=36%).
You can also use the rule of 72 to determine when your debt will double. An example of this would be
if you borrowed $500 dollars from your friend, who is charging you 6% interest. 72 divided by 6 is
12. So, 12 is the number of years it would take for your debt to your friend to double to $1000 dollars
if you did not make any payments.
You can also determine how inflation works against you. “T he government tells us we have had about
a 6.9% inflation over the last 15 years” (The Motley Fool). In this instance, for your buying power to
stay even with inflation you must earn at least 6.9% more income each year. You can determine the Res ource s Did You Know
time that it will take to half your buying power by using the rule of 72. At 6.9% inflation it will take
just over 10 years for the buying power you have today to be cut in half. Cilek, Chuck. (1998). Subject Analys is - Rule of 72.
Available from www.ruleof72.net
While considering different types of investment vehicles, remember that the rule of 72 can help you
make intelligent decisions including tax repercussions. “Consider this, you are earning 6% on your
savings but you are in a 33% tax bracket. After the taxes on your interest, you only earn 4% interest.
Using the rule of 72, it will now take 18 years for your money to double instead of 12 if it were in a tax
deferred account. In this example, paying taxes on your savings can effectively cost you 6 years of
growth” (Friedman).
The “rule of 72”is a rule of thumb. Like any rule of thumb, the rule is only good for approximations.
It also assumes an annual percentage interest rate. It is by no means exact. At 1% interest the exact
amount is 69.66 and using the rule of 72 it is 72. At 4% interest, the exact amount is 23.45; the rule of
72 is 24 years. So it is an approximation, but it is also pretty accurate, up to 20% interest.
To demonstrate the ease of using the approximate value of the rule of 72 verses determining the

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11-01-2011 Generated
Albert Einstein's Greatest by Foxit
Discovery: The… PDF Creator © Foxit Software
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exact number at 10% interest, “consider the following derivation: Determine how long it takes a given
principle (P) to double given either the interest rate (r) or the number of years (n). The equation
looks like this:
P * (1+r/100)^n=2P
In this case solve for r=10%.
P * (1+10/100)^n=2P
Cancel the P’s :
(1+10/100)^n=2
1.1^n=2
Solve for n using logarithmic function
(Natural logarithm = ln (a^b)=b * ln(a))
n * ln(1.1)=ln(2)
n * (0.09531) = 0.693147
n = 7.2725527
Which means that at 10% interest, your money doubles in about 7.3 years” (Cilek, Chuck, 1998). The
rule of 72 is a remarkably accurate and a much easier way to determine quickly how long it will take
to double your money as long as the interest rate is below 20%. Above 20%, the rule becomes
significantly inaccurate.
Albert Einstein truly understood the power of compound interest and the simplicity of the rule of 72.
“Albert Einstein called compound interest the eighth wonder of the world and mankind’s greatest
invention because it is the mightiest force ever unleashed for the amassing of wealth“ (Mauder). The
rule of 72 is simple and powerful, yet unknown by many business owners, professionals and
individuals. Remember that you can use the rule of 72 forwards and backwards. To determine the
time to double an investment, or the interest rate needed to double money in a given time. If you are
still wanting, you can use the rule of 113 to determine how many years it will take to triple your
money.
References

Cilek, Chuck. (1998). Subject Analysis - Rule of 72. Available from http://www.ruleof72.net
Friedman, S. Morgan. Einstein: Light to the Power of 2. Available from http://www.devine-
ent.com/shows/inventors/einstein.shtml
The Motley Fool (1997). Rule of 72. Available from http://www.fool.com
Mauder, Dave. The Most Powerful Force On Earth... Is It Working For You? Available from
http://www.mauder.com/articles/sr_powerfullforce.htm

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Published by L.E. Duncan

A writer, photographer, traveler and investor. I have been writing internet content for six years. If you are interested in
specific content, don't hesitate to contact me! View profile

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Albert Einstein's Greatest by Foxit
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2 Comments
Post a Comm ent

Susan Corbett 03/25/2007

Neat math. I like formulas. :)

Douglas
(Guest) 12/17/2006

It's never been verified that Albert Einstein ever claimed that "compound interest is the greatest wonder of
the universe" -- in fact, most researchers now dispute that he ever said anything related to compound
interest (see http://www.fool.com/foolu/askfoolu/1999/askfoolu990915.htm or
http://www.snopes.com/quotes/einstein/interest.asp or
http://timpanogos.wordpress.com/2006/07/22/einstein-compound-interest-does-not-compute/). He most
certainly DID NOT discover "The Rule of 72", either. Such disregard of facts muddies the intent of this
article.

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