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March 12, 2008


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Great post - I didn't know about the rule of 72, I'll certainly keep that in mind!

By the way, is the legal disclaimer at the end really necessary? Not trying to be snarky, just wondering if I should be putting it at the end of all my posts :)

I have to think that the rule of 72 predates Einstein. According to Wikipedia, it was referenced by Luca Pacioli (the father of modern accounting) in Summa de Arithmetica in 1494, and probably predates that.

I've heard that Einstein quote before, and always wondered what his context was, though...

Master --

The disclaimer at the end was submitted by the guest poster when he gave me the piece, that's why I've included it.

Yeah, it's not Einstein's rule... it has been around for centuries..

Please correct a common error that people make. All modern-day loans use simple, not compound, interest.

Whether you pay a credit card, car loan, or normal mortgage, you always pay your *ALL* your interest first and a little bit of principal. The only time you compound your interest is if you get a negative-amortization mortgage. Then, your monthly payment does not even cover the interest owed, so you end up paying interest on your interest.

Also, note that the Rule of 72 is just that - a rule, not a formula. I believe that it underestimates below 4% and overestimates above that.

Compound interest could indeed produce miracles since all interest earned by the principal or original amount would be added in the next computation of interest that it will earn. Let us cite an example, if $ 1,000.00 earns 3% annually after a year your original amount will be
$ 1,030.00, then if you do not touch your invested amounts in the ensuing year it will be
$ 1,060.90, on the third year it will be $ 1,092.27, so this is what Albert Einstein was saying that compound interest is one of the seven wonders of the world. The rule of 72 is a magic formula created since it provides the number of years where your capital invested will earn 100% profits, simple yet very effective. The best analysis made on the compound interest is that your earned interest earnings though small in the beginning will also earn interest earnings in the next succeeding computations if you do not touch the interest and the capital. This is the reason why they say your money is also your friend and/or your employee since it can work for you instead of against you. Money invested are like your workhorse or pool of employee creating wonders to earn more interest earnings for you. The rich people have only one rule make their money work for them while the middle class work for their money - they live in instant gratification, living pay check to pay check and spending their money on consumables. Always, the golden rule is to follow the advice of the Richest Man in Babylon - part of what you earn is yours to keep. In the west, we call it, pay yourself first by having automatic 10% deductions in your salary for savings or mutual fund investments or investment in stocks or bonds. Today as we see the economic recovery on the way we must exercise caution and follow strictly to the letter the miracles of compound interest because no less than Albert Einstein is a firm believer of this mathematical concept.

What planet has this author been living on? Even Albert Einsten would understand that doubling a penny a day ONLY works if the value of the penny also doubles every day. And in what universe does a penny double its value daily? But people can and do make $100 per hour. Do you suppose the value of his home doubled every day? Did yours? Don't quit your day job .... and don't give your money away to those who write Get-Rich-Quick-Books

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