(By Paula Pant )
Some of the most important math skills you need, it turns out, are the basic ones you learned in fourth grade. Simple double-digit multiplication and division can help you TRIPLE your money.
There are two handy rules of thumb that I use when I’m calculating how well an investment will pay off. One is called the “Rule of 72,” and the other is the “Rule of 115.”
Let’s take a look at how they can boost your wealth.
The Rule of 72
The Rule of 72 shows you how quickly you will double your money. All you have to do is divide 72 by the interest rate it’s earning. This is the number of years it will take for your money to double.
For example, if your money is earning an 8 percent interest rate, you will double your money in 9 years (72 divided by 8 is equal to 9).
If your money is earning a 5 percent interest rate, you will double it in 14.4 years (72 divided by 5 is equal to 14.4).
If your money is earning a measly 1 percent interest rate, it will take you – yep, you guessed it – a whopping 72 years to double it.
Remember: this is a “Rule of Thumb,” not an iron-clad law. The Rule of 72 doesn not adjust for details that make a significant dent in your returns, like taxes and your fund’s administration fees.
However, it’s a useful guide for making a quick mental calculation of how long it will take you to turn Rs 10,000 into Rs 20,000.
Besides, it’s a fantastic reminder of how powerful a single percentage point can be.
The difference between 6 percent and 7 percent does not sound like much. But the difference between doubling your money in 12 years versus doubling your money in 10.3 years sounds a lot more significant.
As a side note, the Rule of 72 assumes that your money “compounds annually” – a term which means that once a year, your interest gets added to your principal and the entire amount is reinvested.
(Interest is the money you have earned; principal is the money you have started with)
The Rule of 72 is also a helpful tool to illustrate the power of compound interest – which Albert Einstein reportedly said is the “most powerful force in the universe.”
The Rule of 115
I recently learned about the Rule of 115, which is what follows the Rule of 72. If you think that doubling your money is not good enough, then the Rule of 115 is for you. This ‘Rule of Thumb’ shows you how long it will take to TRIPLE your money.
I bet you can guess how the Rule of 115 goes. Divide the interest rate by 115. This is the amount of time it takes you to triple your money.
For example, if your money earns an 8 percent interest rate, it will triple in 14 years (115 divided by 8 is equal to 14.3).
If your money earns a 5 percent interest rate, it will triple in 23 years (115 divided by 5 is equal to 23).
Note that tripling your money is easier – in some respects – than doubling your money. If you’re earning a 5 percent interest rate, you will spend 14-and-a-half years trying to double it, but only an additional 9 years tripling it.
Compound Interest Is Your Friend
The Rule of 115 is also thanks to the power of compound interest. The more interest your money earns, the more your money will work for you.
However, this assumes you reinvest the interest rather than spend it on some new clothes or games.
I told a friend about these rules once, and she asked a fantastic question: “How do I reinvest the interest? How do I know if I’m already doing that or not?”
”If you’re not getting a check or a payment from your investments each year,” I replied, “you’re probably reinvesting the interest.”
Look at the page – or the computer screen – where you buy your funds. You should see a little box that says, “reinvest interest and dividends.” That box will probably be there regardless of whether you’re investing in mutual funds, stocks, bonds or exchange-traded funds.
Check that box and then forget about it. Wait 14 years. Watch your money triple.
It’s that simple.