Thu 15 Nov 2007
How the Rule of 72 Spots the Too-Good-To-Be-True Deals
Posted by Robin Bal under Financial Planning , MoneyMatters , Personal Finance[8] Comments
You may have heard the saying ‘If it sounds too good to be true, it probably isn’t true’. But how do you work out what could be too good to be true?
Start with the rate of return you have been offered. Most investments illustrate their rates of return using percentages. While that’s perfectly reasonable, research suggests that many people have trouble working out percentages, especially in their heads.
To determine how many years for your capital to double, you bring to mind the Rule of 72, which tells you to always divide the capital by the interest, and the result is in how many years it will be doubled. This is simpler than it seems. Before calculators or spreadsheets, investors used the trusty old ‘Rule of 72’.
How the Rule of 72 works
Suppose you were offered an investment with a return of 10% per year and you reinvested all your returns. How many years would it take to double the value of your original investment?
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