Friday, October 14, 2011

Law of 72 and Compound vs. Simple Investments Explained

Having taken economics over the summer, I was very excited when my Math teacher requested me to give a brief summary of the “Rule of 72” in class. Unfortunately, I fell ill on the day I was supposed to summarize the rule, (Sorry Mr. Tramontana!) so will explain it’s function here.

The Rule of 72 is an important investment technique, which is essentially an approach used to estimate the amount of time required to double an investment. The formula (Time to Double = 72/ interest rate) is shown below. It is very important to note that this law applies to compounding interest, as opposed to simple interest. Compounding interest is interest calculated on both principal and accumulated investment, while simple interest is interest calculated on just principal investment. Let’s show examples of all three concepts (Law of 72, Compound Interest, Simple Interest) below.

Slide One: Rule of 72: Formula and Example

Slide Two: Simple vs. Compound Interest Formula

Slide Three: Simple vs Compound Interest Application

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