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Thursday, Oct 23, 2014
Letter of the Day

A valuable addition to your mental toolkit

Published:

As part of my eclectic hillbilly education I had to take boring, cookbook-style courses such as accounting (with apologies to “greenshades” everywhere). Yet even highly prized truffles can occasionally be found within this landscape. The “Rule of 72” is one such truffle.

The Rule of 72 is a heuristic, a rule of thumb, to determine how many years for some quantity to double. The mental shortcut provides not exactness (try 69.3 for exactness) but a very close approximation. Folks such as Warren Buffett use it all the time. The rule demonstrates the effect and power of compounding.

The Rule of 72 is ciphered thusly: You invest $1,000, expecting to yield 6 percent per year. How long will it take the principal to grow to $2,000 without any further deposits or withdrawals? You simply take the figure 72 and divide by 6 to arrive at the answer of (approximately) 12 years.

So, why is all this so dadgum important? Easy. It has universal application, and to illustrate one specific, there have been recent articles warning of flood insurance premium increases of from 10 percent to 25 percent as far as the eye can see. At the lesser value, your premium would double in a little over seven years. At the higher rate, in less than three years. This future event has not been explained by the media, including the Tribune. Other examples are only limited by imagination.

Now it should become much clearer how a little heuristic like the Rule of 72 can become a valuable addition to your mental tool kit.

Syd Comer

Brandon

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