Every rate rise has a doubling time

When they teach you maths at school they want to complicate matters. That’s why most people leave school completely upended by it all. However, if they are like me, they go away, they learn it themselves, then they apply it in the real world. That way the learner actually gets to learn something useful. Today I’m going to show you one of the most useful parts of maths you’ll ever need to know. It’s how to quickly calculate how long it takes to double any given percentage without having to use a spreadsheet.

Now I’m not going to explain to you how mathematicians derived this method, because that would be confusing. If you want that, go to a YouTube channel that explains it. The method is dead simple.

If someone tells you that your money will grow at 7% per year if you invest in something, how long will it take to double your money? It’s really easy to calculate:

You just use the Rule of 70. Simply divide 70 by the growth (or fall) rate. Using the above example divide 70 by 7 which gives 10 years. That’s all you need to do. Let’s look at few more examples:

Imagine I offer you an investment at a rate of 3.5% per year. How long will it take to double my investment? 70 divided by 3.5 = 20 years.

Let’s look at your bank account. What percentage rate are they paying you? Do you know? Probably it’s quite low, because since the 2007/8 economic crash, banks have been offering little interest, and making people in debt pay a lot of interest, or a lot more than they used to do!

One US bank is paying 0.05% per year. That means your money doubles 70 divided by 0.05 which equals 1400 years! Yes, invest a dollar today and it’s two dollars in 1400 years! However, borrow money on a credit card and they want to charge you 22.99% which means your payments are doubling every 3.045 years. (70/22.99).

You can now apply this not only to your money, but to how you view the news. Think about any rate per year given as a percentage, and you can now calculate the doubling time. You can apply this method to any form of growth or decline that is pretty consistent over time. For example, electricity prices have on average risen by 7% a year since 1950 in the USA. (My figure looks at the overall averages of the nominal prices – i.e. not accounting for inflation.) You can also apply it to population growth. If your areas population is growing at 1% per year, then it will take 70 years for your community to require twice the amount of housing, schools, hospitals and sewerage capabilities. A human lifetime is nothing in great scheme of things.

Next time, I’ll teach you about growth factors…See you then.

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s