Did you know that the rule of 72 applies equally for Did You Know subscribers in Australia, Africa, Bahrain, Canada, Germany, Indonesia, India, Ireland, Malaysia, Mexico, The Philippines, and the United States? In fact the rule of 72 is one of those “universal laws” that was first referenced in print in 1494. What is the rule of 72 and why is it important for you to know how it works?
The rule of 72 states that in order to find the number of years required to double an amount of money at a given interest rate, you divide the rate of interest into 72. The result is the approximate number of years that it will take for your investment to double.
Example: $100 earning 10% interest compounded annually will be $200 in 7.2 years (72 ÷ 10 = 7.2)
This formula is useful for financial estimates and understanding the rate of growth of not only money, but populations and the impact of inflation – also known as “exponential decay”. For example if your country’s inflation rate goes from 2% to 3%, your $100 will have the buying power of $50 in only 36 or 24 years, or 14.4 years if inflation goes to 5%! (A top economist with a Canadian bank recently stated that Canada’s inflation rate for this year will come in at 3% ‘but expected to go to 2% next year’)
What about university or college tuitions? If they increase at a rate of 5% per year than tuition costs will double in the same 14.4 years (72÷5).
Let’s not overlook credit cards – especially at this time of year! If you pay 15% interest on your outstanding balance, the amount you owe will double in only 4.8 years (72÷15)! A very recent Canadian survey said the average credit card debt is $13,000!!
In a previous Did You Know I talked about selling insurance that your clients will “grow into” by protecting what their life and life style will likely be in 5 or 10 years. Now add to that discussion the rule of 72 to determine what those dollars will really be worth given current interest and inflation rates. The rule of 72 along with everyday life changes highlight the need for yearly detailed disability, life, critical illness and long term care insurance review meetings!
Wishing you the safest, happiest, healthiest and most wonderful of holidays! Until 2012 – cheers! Helena
p.s. Stay tuned for the launch of Insurance Know-How’s Store … coming soon with lots of easy to use products and templates that will dramatically improve your insurance sales results!
p.p.s. Are you adding a family protégé to your practice? Don’t struggle with training; hire a training and succession professional! Click here to learn more about Insurance Know-How’s new Family Matters programme.