A Math Lesson with Dad. “Rule of 72”

Since 2019, when my son, Simon, started school, I’ve written him a small note each day. At first, his teachers or the lunch staff would read it to him because he couldn’t read yet. Later, I switched to cursive, not realizing his cursive would soon outshine mine!

He asks great questions and is always eager to learn. He’s also patient and listens carefully, even to unusual questions. Sometimes an answer to a question not yet asked!

Since we often do homework together, I want to share a math conversation that reflects the kind of financial literacy I wish more adults had.

Me: Simon, let’s go over some cool math today. No, I will not pester you about prime numbers! You know how we practice doubling numbers, like when we say 1 + 1 is 2, and 2 + 2 is 4?

Simon: Yes, Dad. Those are easy.

Me: I know. But, not easy for everyone. Doubling is super important. It is a building block for more complex math as you now know. You often ask me about my work and I wish more people knew this thing in finance called the “Rule of 72”. It relates to doubling, but more complex.

Simon: How so?

Me: The Rule of 72 helps people figure out how long it will take for their money to double if they invest it at a certain interest rate. What’s an “interest rate”? An interest rate is the cost of money. So, if you have $100 and you want to know when it will become $200, you can use this rule.

Simon: Cool! But how does it work exactly?

Me: Well, you take the number 72 and divide it by the interest rate. For example, if you have an interest rate of 6 percent (“6%”), you take 72 and divide by 6, which equals 12. This means your money would double in about 12 years.

Simon: Really? But it seems a lot harder than just adding.

Me: Yes. And that’s the difference. Doubling is straightforward, like adding or multiplying by 2. But the Rule of 72 is more about understanding how money grows over time, which involves some advanced math. It helps to also appreciate that with more time, you have more chances to grow your money.

Simon: So, are they related because they both talk about doubling?

Me: Exactly! They both use the idea of doubling, but in different contexts. The doubling aspect you learn now will help you later on when you understand how to handle money.

Simon: Got it! It’s like building a strong base for more complicated stuff later. I learn this in some of my games too.

Me: Yes. I know. You are doing great, and I am very proud of you. Let’s keep practicing reading and math.

Caveats:

The Rule of 72 is a valuable tool, but it has limitations. Accuracy decreases at extreme interest rates; interest rates can vary while this rule assumes constant rates; the rule does not consider fees and taxes; and, does not account for risk. These are some of the more common issues with the Rule of 72.

Disclaimer: This is not financial advice. The information provided is for general informational and educational purposes only.