I have been a fan of Charlie Munger's principle of keeping mental models, which will help one think properly and make prompt and correct decisions in most circumstances. I thought I should remind myself of the mental models I have been following, consciously or subconsciously, which suit my life very well.
Rule of 72 is one of them. The rule helps one to calculate how many years it will take for an amount of money to double at a given rate of interest. If the rate of interest is x% per year, then the money will double in (72 / x) years. For example, if rate is 9%, money will double in (72 / 9) = 8 years.
This rule also has a hidden rule in it, because it works only for compound interest - which means, one cannot take the interest out of the account at the end of each year. Thus discipline is required for the rule to work.
The math behind this rule is not complicated for the mathematically savvy. But the rule works whether you know how to derive this rule yourself or not! There are people who can do much more sophisticated math, yet fail to take advantage of the rule!
Rule of 72 is one of them. The rule helps one to calculate how many years it will take for an amount of money to double at a given rate of interest. If the rate of interest is x% per year, then the money will double in (72 / x) years. For example, if rate is 9%, money will double in (72 / 9) = 8 years.
This rule also has a hidden rule in it, because it works only for compound interest - which means, one cannot take the interest out of the account at the end of each year. Thus discipline is required for the rule to work.
The math behind this rule is not complicated for the mathematically savvy. But the rule works whether you know how to derive this rule yourself or not! There are people who can do much more sophisticated math, yet fail to take advantage of the rule!
