Rule of 72
The "Rule of 72” is useful to remember in Human Resources operations.
| Rule of 72 |
If you divide the interest rate of the compounding period into the number 72, your answer will be the number of compounding periods it will take for the original sum to double. |
Remember:
Number of compounding periods to double a sum |
= |
___72___
Interest rate of corresponding compounding period |
Example: If you invest $40,000 in a CD at 6% interest (compounded annually), how long will it take for your money to double?
72 ÷ 6 = 12
It will take 12 years for your money to double.
Additional Example
Currently (2011), the average MBA starting salary is $55,000*. You predict starting salaries to increase at a rate of 9% per year. Using the Rule of 72, determine the starting salary for an MBA 16 years from now.
Divide the percentage into 72.
72 ÷ 9 = 8
Eight is the number of years it takes for the salary to double. In 16 years, the salary of $55,000 will double twice:
Current: $55,000
+8 Years: $110,000
+16 Years: $220,000
Starting salary for an MBA in
16 years is expected to be $220,000.
*Value used for illustration purposes only.
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You are investing in a $1,000
CD at 8% interest. How long will it take you to double your money? (Assume
the interest is compounded annually.) |
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