The Rule of 72 has been around forever and is a very simple way to determine how many years it will take to double your money or the funds invested in your investment portfolio.
If you want a shortcut approach to estimating how compound interest will affect your investment holdings over time, the Rule of 72 is simple enough for the most math-hating individual to utilize. Literally anyone can crunch the numbers and make financial estimates using the Rule of 72 formula.
How the Rule of 72 Works
To estimate how long it will take you to double your investments, use the formula below:
Time (in years) to double your investment = 72 / r
Where r is the annual interest rate (or expected rate of return) expressed as a whole number.
Example 1: Jake has put $10,000 in an investment that earns 8% per annum. How long will it take him to double his initial investment?
[su_note note_color=”#fceba9″]Time required to double funds earning 8% = 72/8 = 9 years[/su_note]
After 9 years, Jake’s initial investment of $10,000 will grow to $20,000.
Using the same scenario above, if we vary the interest rate (rate of return), Jake can expect to double his investment as follows:
- 3% = 24 years
- 4% = 18 years
- 5% = 14.4 years
- 6% = 12 years
- 7% = 10.3 years
- 8% = 9 years
- 9% = 8 years
- 10% = 7.2 years, and so on…
The examples above assume we know the expected rate of return.
What if we don’t know that the interest rate (or rate of return) is, but have an investment timeline in mind for when we want our money to double? We can re-arrange the Rule of 72 formula as follows:
Rate of return required to double investment = 72 / length of time
Example 2: Jake has $10,000 at his disposal and wants to double it in 6 years. What is the rate of return required for him to accomplish his goal?
[su_note note_color=”#fceba9″]Rate required to double his funds in 6 years = 72/6 years = 12%[/su_note]
Therefore, Jake needs to put his $10,000 in an investment that pays 12% per annum if he’s to have $20,000 in 6 years.
*Note: As interest rates go higher, the Rule of 72 becomes less accurate. However, it remains good enough to get a rough idea of your expected investment horizon.
Although the Rule of 72 is not as accurate as using your scientific calculator or spreadsheet, it remains a superb shortcut to mentally estimate how long it will take to double your money while taking compound interest into consideration.
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