The Rule of 72 is a fantastic medicine in your financial health kit. One of the most common calculations people are interested in doing is figuring out how long it will take for their money to double. In my articles on compound interest and using spare change, I showed you just how powerful a tool interest is over long period of time, but the calculations are fairly intensive and can be difficult to compute on the fly or in your head.
Have you ever heard of the Rule of 72? It’s extremely useful for figuring out how quickly your investments and savings will double, and is simple enough that most people can do a rough estimate in their head. It assumes annual compounding and a few other things, so do keep in mind that it isn’t 100% accurate! But then, it isn’t meant to be either. The Rule of 72 is designed to provide a quick approximation for those interested.
The principle is easy: simply divide the expected interest rate into 72 and you’ll get a quick estimation of the number of years it will take to double your money. For example, if you are investing in something that gives you a 5% interest rate, you can calculate that 72/5 = 14.4 years. Exact calculations will show that the true length of time is 14.21 years – not bad for a quick estimate! This works for most interest rates, but is best for returns in the normal realm (between 3 and 10%). Even outside of this range the answer is still quite close!
Another useful point is that it works both ways; you can figure out roughly what interest rate you will need to double in a set amount of time by dividing the number of years into 72. If you want to double your investment in, say, eight years, then: 72/8 = 9. You’d need about a 9% annually compounded rate of return to double your investment in 8 years (note: the true value works out to be 9.05%)!
You can also use numbers between 68 and 76 to get a slightly less accurate estimate if you are working with odd numbers, your mental math skills aren’t quite that good, or if decimals give you headaches (like most of us!). 72 divided by 6 is easy, but what about 72 divided by 5? 70 is much easier to work with, and gives almost as good a result. Alternatively, check out these handy calculators which demonstrate the power of the rule of 72!
Tags: banking, goals, interest, investing, making money, savings
