Here’s a quick and dirty way for estimating the annual compound interest on an investment. It can also be used to estimate doubling costs due to Inflation which is the same as losing half your money.
It’s called, the Rule of 72. Spreadsheets have the proper calculator.
Always consult an Investment Advisor before investing.
Here is how the Rule of 72 works:
- Enter 72 in your calculator
- Divide it by the annual Interest Rate (IR) (If it is between 6 and 10%)
- The result is the number of years it takes to double your investment.
- EXAMPLE: 72 divided by 6 (the IR of 6%) Equals 12 and 12 years, the number of years it takes to double your investment.
Inflation – The Reduction of the Value of Money
Inflation means it takes more money to buy something. Here’s what happens when the Rule of 72 is applied to annual Inflation Rate.
Canada – September 2022 Rates of Inflation
The Overall Annual Inflation Rate is 6.9%. Estimation: (72/6.9 = 10.4) Prices of everything will double in 10.4 years
Food Inflation Annual Rate: 10.28 – Estimation: (72/10.28 = 7.0) Prices double in 7 years
Energy Annual Rate is 14.01 – We now use the Rule of 74 (you don’t need the details) The Result: (74/14.01 = 5.3) Price Doubles in 5.3 years
Transportation Annual Rate is 8.68 (72/8.68 = 8.3) Cost Doubles in 8.3 years
Inflation reduces the value of your money pretty quickly. Inflation must be reduced – or you need a huge raise.
