Fun with numbers


After a few recent conversations about the rapidly increasing cost of healthcare, I learned that many people are unfamiliar with a very useful math shortcut. It’s called the Rule of 72, and it helps you quickly calculate how long it will take for your investment — or your expenses — to double.

To use this trick, take the number 72 and divide it by the annual rate of increase. For example, if you earn 12% a year on an investment (lucky you!), the number of years it will take to double your money can be calculated as 72/12, or about 6 years. Similarly, if your health insurance costs rise by 18% a year, then those costs will double every 4 years (72/18).

I’m sure there are some details I’m leaving out. For instance, I believe the formula assumes that annual compounding occurs, and the estimate tends to be less accurate when interest rates get very large. Regardless, I think everyone should take a few minutes to learn the Rule of 72, since it helps you perform a valuable reality check on how good an investment is — or how awful an expense is becoming.