1 post tagged “rate of return”

Three practical rules anyone could benefit from are the 80/20 rule, the rule of 72 and the rule of 150.  Alone or together these rules provide an easy way to make better business management decisions.

The 80/20 rule was developed by  Pareto.  An Italian economist who observed that 80% of income in Italy went to 20% of the population.  Today, this rule is widely applied.  When in doubt it is a good rule of thumb.  For example, 80% of sales comes from 20% of the customer base.

Rule of 72 is a financial rule.  Perhaps the most important rule when it comes to understanding the power of compounding interest and investments.  It is powerful for its simplicity, yet quickly gives you a good grasp in understanding your money.

The rule of 72 simply states that if you invest your money at a certain rate of return your money will double by dividing the rate into 72.  For example, if you are getting an 8% return on your investments then (72/8) your money ought to double in 9 years.  It also works if you want to know what rate of return you need to double your money.  For example, if you want to double your money in 6 years you will need a rate of return of (72/6) 12%.  Please note this assumes that the rate is consistent throughout the life of your investment.

The Rule of 150 states that the optimal size for a group size is 150. Humans could only properly maintain proper relationships in a group no bigger than 150.  Perhaps the best example of the use of this rule is Gore Associates, the maker of Gore-Tex fabric.  When asked when they know to build a new plant, the answer is simple, when all 150 parking spots are full.

Three simple, practical business management rules that help.