Imagine you could calculate how long it takes to double your money just with a simple formula. Have you heard about the Rule of 72?
The Rule of 72 is a simple, effective rule frequently used to determine how many years are needed to double an investment at a specific yearly rate of return. Also, it can figure out how many years it will take to double an investment by calculating the yearly rate of compounded return.
How to Calculate The Rule of 72?
You just need to divide 72 by the rate of return to determine the Rule of 72. Depending on how the interest rate is stated, you may use the method to get the doubling time in days, months, or years. If you enter the annual interest rate, for instance, you will see how many years it would take for your assets to double.
- What is the doubling time for an investment with a compound interest rate of 8%?
- A person using the Rule of 72 equation would find the doubling time equal to 9 years.
- Then, calculate this by taking 72 and dividing it by 8.
- By performing this, the investor can tell that it will take approximately nine years to double the principal.
- It is fairly accurate as the exponential function yields an actual doubling time of 9.006 years.
How to Use It?
Anything that increases at a compound rate, such as the population, macroeconomic data, fees, or loans, might be subject to the Rule of 72. The economy will double in 72 / 4% = 18 years if the gross domestic product (GDP) rises at 4% per year.
Therefore, you can use The Rule of 72 to show the long-term implications of these charges concerning the fee that reduces investment profits. In around 24 years, a mutual fund with yearly cost fees of 3% will have cut the invested principal in half.
Therefore, a credit card user who pays 12% interest (or any other loan type that charges compound interest) will double their debt in six years.
The Bottom Line
In short, The Rule of 72 provides investors with a quick and simple technique to forecast the growth of their assets. Additionally, this Rule brilliantly illustrates the power of compounding for accumulating wealth. How? By demonstrating how rapidly you can double your money with little effort.
Finally, if you want to expand your financial knowledge with more tips, you can take my course.