The Rule of 72 is a formula used to estimate the number of times a number (X) has to be compounded at a certain percentage in order for the number (X) to double. It is often used in the financial world to estimate inflation. The easiest way to understand this is to look at a series of examples:
72 = 2 x 36
Price doubles in 2 years if compounded at 36% annually.
Price doubles in 36 years if it’s compounded at 2% annually.
72 = 7.2 x 10
Price doubles in 7.2 years if it’s compounded at 10% annually.
Price doubles in 10 years if it’s compounded at 7.2% annually.
72 = 12 x 6
Price doubles in 12 years if it’s compounded at 6% annually.
Price doubles in 6 years if it’s compounded at 12% annually.
Let’s apply this to a real life case:
This was my bus pass. The monthly travel bus pass for tertiary students in 1990 cost $27. 30 years have passed and the same now costs $55.50. The price has roughly doubled. We can estimate the annual price increase (compounded) by applying the Rule of 72:
72 = 2.4 x 30
In financial lingo, we can say that bus fare has increased by 2.4% annually over the last 30 years. Numbers don’t lie, but they are meaningless. Only when context is attached to numbers will they begin to make sense and cause people to react.
Whether or not 2.4% inflation on bus fare is an acceptable figure, is not only a a discussion for the economic and political departments in academia, but also for you to have with your children. If bus fare continues to inflate at 2.4% annually, what does it mean and how will it affect your lives? What other factors do you need to consider to make the conversation more meaningful? Income growth, interests rates, and what else?
Virtual or real money, online games or Grab, your children are confronted with money issues. They are not too young to learn about money and how it works. Teach them to use the calculator and don’t let tedious computation get in the way of learning the important lessons. The ability to make sense of numbers is different from the ability to compute numbers.