This is a guest post by Dax Desai. I write at a self-named blog about daytrading, financial planning, and small business issues, and whatever invades my mind at the moment.
I was interested in doing a guest post at this blog and when I saw he was going on vacation I jumped at the opportunity. This blog discusses many ideas that I totally agree with. Recent posts about the falling dollar and investing in foreign currency are right up my ally. I have definitely had a few inspirations from the posts. I’m actually thinking of buying a Canadian Income Fund that was mentioned on this blog. These are quality posts and I’m glad to be a guest blogger.
I am very aggressive with my investments since I day trade in addition to investing in alternative investments. I’ve either been lucky over the past 10 years or I’m very good. Either way my broker is happy for it.
As an aggressive trader, I always plug away at numbers in my head. I’m almost ashamed to say I have a calculator by my bed. One of the things I always keep my eye on is how fast my money is growing. Also I estimate from time to time how long some of my risk capital will double, triple, or even quadruple. To do so, you don’t have to have 99.99% accuracy. That’s where the “Rules” come in.
The Rule of 72
You may be familiar with the Rule of 72. This formula can be used to estimate how long it will take to double your money based on an interest rate.
Example:
You expect to get an 8% return on your money. How long would it take to double your money base on that interest rate? To estimate, simply divide 72 by 8 and you will get 9 years.
The formula is fairly accurate for estimating.
| Interest Rate | Period to Double |
|---|---|
| 4% | 18.0 years |
| 5% | 14.4 years |
| 6% | 12.0 years |
| 7% | 10.3 years |
| 8% | 9.0 years |
| 9% | 8.0 years |
| 10% | 7.2 years |
The formula is most accurate between 5 and 9 percent. Above and below it is less accurate, but still useful for estimation.
The Rule of 114
The Rule of 72 is great for estimating how long it takes to double your money, but what if you are more ambitious and want to triple it? That’s when the Rule of 114 comes in. Divide 114 by your expected interest rate. Using the 8% return figure from the first example, we would calculate it as 114 / 8 = 14.25 years.
| Interest Rate | Period to Triple |
|---|---|
| 6% | 19.0 years |
| 8% | 14.3 years |
| 10% | 11.4 years |
| 12% | 9.5 years |
The Rule of 144
To estimate how long it will take to quadruple your money, you can use the Rule of 144.
| Interest Rate | Period to Quadruple |
|---|---|
| 6% | 24.0 years |
| 8% | 18.0 years |
| 10% | 14.4 years |
| 12% | 12.0 years |
Time Value of Money
These 3 rules underscore the concept of the Time Value of Money. Time value of money simply states that money received today is worth more than the same amount received in the future. The core principle of finance holds that if money can earn interest, an amount of money is worth more the sooner it is received. The current value is called Present Value or Present Discounted Value.
Time Value of Money is useful for financial planning for things such as retirement and college financing. If you remember anything remember, a dollar today is worth more than a dollar tomorrow.