I think the title (and the accompanying graphic) accurately reflect the thoughts that were going through the mind of myself and a member of our dinner party tonight as the two of us were having a discussion.
The dinner was a gathering of the faculty who are teaching in this study abroad program in London; I was the only American at the table, the other three faculty were from the U.K.
At one point in the conversation, one of the other faculty told me that he had been teaching the students about the time value of money, and the rule of 70. I must have looked confused, because he asked me if I had ever heard of the rule of 70. I said I had not, but I had heard of something called the rule of 72, which he had never heard of.
I had written about the rule of 72 as part of a longer post, and here is how I explained it:
“One final example related to compounding is something known as the Rule of 72. The way this rule works is that it allows you to get a rough idea of either how long it will take to double your money given a certain compounding rate, or alternatively, what compounding rate you would have to earn if you want to double your money in a certain number of years.
For example, if you want to double your money and believe that you can earn a 6% return, you divide 72 by 6 and you would get 12 years. If you would like to double your money in 8 years, you would divide 72 by 8, and the result would be a compounding rate of 9%. The rule of 72 gives remarkably close results to what you would get if you used Google or Excel.”
As the faculty member started to explain the rule of 70 to me, it became obvious that he was describing what I had always referred to as the rule of 72. I thought perhaps he had just made a slip of the tongue and was saying 70 when he meant 72. I’m guessing he may have been thinking the same bout me.
So as soon as I got home from dinner, I looked up to see if there was such a thing as the rule of 70, and indeed there is.
I found a great article that compares the two approaches; here were some of the key takeaways:
- the Rule Of 70 is more accurate up to 4%
- you can use either at 5% (though the Rule Of 72 is slightly more accurate)
- the Rule Of 72 is more accurate from 6% to 10%.
- Overall, accuracy declines as the growth rate increases.
- Assuming the growth rate to be negative, the Rule Of 70 is always more accurate than the Rule Of 72.
But the most revealing statement int he article, and almost creepy in how relevant was to the discussion i had at diner tonight was the following:
Often, adherents of one of these rules of thumb are to surprised to learn of the existence of the other.
That would certainly be true of me; I’d never heard of the Rule of 70, and it seemed as if my fellow faculty member had never heard of the Rule of 72.
So hopefully this experience will help me to remember that just because I’ve done something the same way for over 40 years doesn’t necessarily make it the right way or the best way to do something and that it is possible for two people in a discussion to both be right.
The other takeaway is to start saving as much and as early as you can…