Effective Debt Management Using The Rule Of 72.

“The most powerful force in the universe is compound interest,” said Albert Einstein. It is expressed in a mathematical formula called the Rule of 72.

While Albert Einstein is really more popularly known for discovering the theory of relativity, some people say that the Rule of 72 is his more important discovery. The Rule is said, however, to have been in existence long before Einstein was born. The general consensus is that Einstein made the rule popular.

So what is the Rule of 72 ? Why is it considered a basic rule that every-want-to-be-investor should know. The Rule of 72 allows you to determine when money would duple and how many years would it take to do it.

The math is not that hard. You only have to divide 72 by the interest rate and it will equal to how many years it will take for money invested to duple. But the Rule of 72 is not only limited to determining investments but can also be utilized in debt management. Thus the rule can also be equated this way: 72 / interest rate = number of years for your debt to double

As you can see, the Rule of 72 can also be used to find out the number of years your debt will duple. Whether that debt is by credit card, loan or mortgage, the Rule of 72 can be used.

Let us make a case in point using credit card interest rates. Most credit card companies here in the Philippines have 3.5% interest rate that amounts to 42% interest in a year. Now we divide 72 by 42 and the resulting answer will be the amount of years it takes for your credit card debt to double. (72 / 42 = 1.7 years or 20/4 months).

How will this knowledge aid you? Though the computation is not precisely correct because we have not considered that you are also paying off your credit card debt at the same time, however, this knowledge will give you a notion of how quickly credit card debt grows. The knowledge that your credit card debt is multiply twice every 21 month will more than convince you to pay up quickly.

Tags: Debt Management, manage debt wisely, Rule of 72

Category: Debt Management