A quick way to calculate how long it will take you to double your money is to use the rule of 72.
Key Takeaways
- Based on a constant yearly rate of return, investors can quickly ascertain how long it will take for their investment to double by using the rule of 72.
- To determine the number of years it will take for your initial investment to double, simply divide 72 by the fixed rate of return.
- To double your money in just over seven years, you would need to earn 10% annually.
If you could find out right away how much your savings will be worth later on, wouldn’t that be fantastic? or the amount you must make on your savings in order to accomplish a goal?
Setting a savings goal is simple, but determining whether you’ll meet it is much more difficult. Saying, “I want to have $1 million by the time I’m 65,” is one thing, but how can you tell if you’re saving enough to make it happen?
Fortunately, there’s a quick way to calculate the potential future value of your investments by applying the rule of 72; all you need to know about maths is simple division.
What Is the Rule of 72?
Investors can quickly ascertain how long it will take for their investment to double based on a set yearly rate of return by applying the rule of 72. To determine the number of years it will take for your initial investment to double, simply divide 72 by the fixed rate of return.
For instance, if the average return on your investment is 6% annually, you can calculate the time it will take for your money to double by dividing 72 by 6. This will take 12 years.
The time it would take to double your money at different rates of return is as follows:
| ANNUAL RATE OF RETURN | YEARS TO DOUBLE |
| 1% | 72 |
| 2% | 36 |
| 3% | 24 |
| 4% | 18 |
| 5% | 14.4 |
| 6% | 12 |
| 7% | 10.3 |
| 8% | 9 |
| 9% | 8 |
| 10% | 7.2 |
According to the statistics, it would take you little more than seven years to double your money if you were to earn 10% annually.
Historical overview of the Rule of 72
The Rule of 72, a fundamental principle in finance, traces its origins back to the ancient world. Although its exact origins are unknown, mathematicians and other academics who were trying to comprehend the concepts of compound interest are thought to have conceptualised it.
One of the earliest references to a similar concept dates back to the 13th century by the Italian mathematician Leonardo of Pisa, often known as Fibonacci. But the Rule of 72 did not start to take shape as we know it now until the 17th century.
The Rule of 72 became well-known during the Renaissance because businessmen and merchants found it useful for projecting investment returns and organising commercial endeavours. Early financiers loved this technique because of its precision and simplicity, which allowed them to rapidly determine how long it would take an investment to double based on a given annual rate of return.
The Rule of 72 has shown to be a useful heuristic in investment analysis and financial planning over the ages. Its applicability is still widespread, having been used by investors and mediaeval merchants alike to assess the growth potential of different assets and portfolios.
The Rule of 72 is still used by investors worldwide as a useful strategy for predicting investment growth and making well-informed decisions about their financial future. It is still taught in classrooms and mentioned in financial literature today. Its long impact serves as a reminder of the ageless lessons found in the power of exponential growth and compound interest.
How to Use the Rule of 72
According to Steve Azoury, proprietor of Azoury Financial and chartered financial counsellor, investors can use the rule of 72 “to estimate how much they need to save in order to arrive at a desired goal for a big purchase or retirement.”
The rule of 72 can be used to reverse engineer how much money you need to invest and at what rate of return to achieve a specific objective. It can also be applied to any size investment and rate of return.
For instance, if your objective is to accumulate $1 million by the time you’re 65 and you’re currently 35, you know you have 30 years to get there. In 30 years, the rule of 72 would need you to earn only 2.4% more money. 72 / R = 30 would be the equation. R stands for return rate. A R solution yields 2.4.
In other words, if you have $500,000 saved up today, you may invest it very conservatively for a 2.4% rate of return and, with no further contributions, still attain your $1 million target in 30 years.
“The real value of the rule will show how important it is to start saving earlier,” Azoury asserts. “Starting to save at age 22 versus age 29 could increase your assets two-fold.”
He asks, What is the question? How many doubling periods will you experience in your lifetime? The answer may indicate how much more aggressively you must invest in order to achieve your objectives.
Tips for implementation
Implementing the Rule of 72 effectively in investment decision-making requires attention to detail and understanding of its applications. Here are some practical tips for utilizing the Rule of 72:
Understand the Limitations of the Rule: The Rule of 72 is most effective when applied to estimated interest rates of 6% to 10%. Despite this, it offers a rapid estimate of the investment doubling time. If rates are well outside of this range, think about using different approaches or modifying your estimates.
Adjust for Different Interest Rates: Modify the Rule of 72 in accordance with interest rates that fall or rise over the usual range. To get a more precise estimate of the doubling time, divide 72 by the actual interest rate. For instance, the doubling time is roughly 9 years (72 / 8 = 9), assuming an interest rate of 8%.
Consider Compounding Frequencies: Divide the interest rate by the total number of compounding periods in a year to modify the Rule of 72 if your investment compounds more frequently than once a year (e.g., quarterly or monthly). This guarantees a more precise approximation of the doubling time.
Use in Long-Term Planning: Rather than being used for short-term gains, the Rule of 72 works best in long-term investment planning. Think about utilising it for long-term objectives like retirement savings.
Combine with Other metrics: For a more thorough study, add more financial measures and tools to the Rule of 72. When making financial decisions, take into account variables including inflation, market volatility, and risk tolerance.
Review and Update Frequently: Depending on changes in interest rates or investment performance, periodically review your approach and recalculate doubling times. Keep up with market developments and modify your strategy as necessary.
Educate Yourself: To make wise judgements, keep up-to-date on financial principles and investment methods. Recognise the underlying ideas of the Rule of 72 and how it affects your portfolio of investments.
Investment Fees and the Rule of 72
The real effect of fees and inflation on your long-term investments can also be seen by applying the rule of 72.
“An investment that charges, say, 3% annually will reduce the returns and thus the time it takes for the investment to double,” Azoury claims.
He claims that utilising the rule of 72 backwards, you can see how inflation has a similar impact. In 18 years, if you get a 4% positive return on your investment, a 4% yearly inflation rate will cut your investments in half. Your money will decrease by half over the course of 36 years if inflation is 2% rather than 4%.
Also read this: The 8 Greatest Strategies for Growth Investing
Understanding Accumulated Depreciation: A Complete Guide for Beginners 2024
The Rule of 72: How Accurate is It?
The future value calculation, which determines how much money will be valued at a specific rate of return in the future, is simplified by the rule of 72.
For rates of return between 6% and 10%, the rule of 72 is the most reliable. For investments with low rates of return, you may want to steer clear of applying the rule of 72 since it may imply that your money will double sooner than it will, according to Derek Miser, CEO of Miser Wealth Partners and an investment advisor.
69.3 is a more exact variation of the rule of 72 than 72, but the resulting numbers are not quite as clean. Another option is to apply the Rule of 70, which is less complicated than 69.3 but still gets closer to the real time worth of money.
The fact that the rule of 72 is predicated on an annual rate of return that is constant is another drawback, as it rarely corresponds with reality.
“A rate of return is actually impossible to predict,” as “investments are never that consistent in real life,” argues Azoury. “Unfortunately, the rule of 72 doesn’t factor in losses, and rates of return can actually change each and every year.”
The more variable the returns on investments, the less accurate the rule of 72 becomes.
Furthermore, according to Miser, “it doesn’t work if you’re looking for a large return in a short timeframe.” For instance, the rule is likely to provide an exaggerated growth rate if you try to apply it to an investment that you wish to double in less than a few years.
“The rule also doesn’t take into account inflation or tax rates, both of (which) could have significant impacts on investment returns,” according to him.
Interactive tools
Here are a few online calculators that you can use to experiment with the Rule of 72 and visualize its impact on your investment goals:
Bankrate Rule of 72 Calculator: With the help of Bankrate’s easy-to-use “Rule of 72 calculator”, users can quickly determine how long it will take for their investment to double by entering their estimated annual rate of return. To learn how different interest rates affect the growth of their investments, users can experiment with various situations. Bankrate Rule of 72 Calculator
Calculator.net Rule of 72 Calculator: Calculator.net offers a Rule of 72 calculator that allows users to adjust parameters such as the initial investment amount, annual addition, and interest rate. Users can see the impact of these variables on the time it takes for their investment to double. Calculator.net Rule of 72 Calculator
SmartAsset Investment Calculator: The investment calculator offered by SmartAsset provides a thorough examination of investment growth, going beyond the Rule of 72. You can get comprehensive growth estimates of your investment over time by entering your investment amount, annual contribution, and estimated rate of return. SmartAsset Investment Calculator
Alternatives to the Rule of 72
Alternative methods for estimating investment growth offer investors additional tools to assess their financial prospects. Here are some alternatives to the Rule of 72 along with their strengths and weaknesses:
Rule of 70: Based on a constant yearly rate of return, the Rule of 70 calculates how long it will take an investment to double, much like the Rule of 72. Because of its round number, the Rule of 70 is simpler to mentally calculate than the Rule of 72, although being slightly less exact.
Compounding Period Formula: Using the formula FV = PV * (1 + r/n)^(nt), where r is the annual interest rate, n is the number of times interest is compounded annually, t is the time in years, and FV is the future value, this formula determines the future value of an investment with compound interest. This approach accounts for various compounding frequencies, enabling more accurate computations.
Financial Software and Online Calculators: A wide range of financial software and online calculators provide advanced tools for projecting the growth of investments. In order to provide comprehensive estimates and assessments, these tools frequently let users enter a variety of characteristics, including the initial investment, yearly contribution, and estimated rate of return.
Financial Models and Spreadsheets: To project investment growth, seasoned investors might find it more convenient to build personalised financial models or spreadsheets. Although it takes more time and experience, this method offers flexibility and customisation.
FAQ’s
What is the Rule of 72?
To quickly calculate the time it takes for an investment to double, divide 72 by the interest rate on an annual basis.
How accurate is the Rule of 72?
For compound interest computations, it’s a ballpark approximation that’s accurate for interest rates between 6 and 10%.
Can the Rule of 72 be used for any investment?
Bonds, savings accounts, and other compound interest instruments that yield steady returns are good candidates for its use.
Conclusion
In essence, the Rule of 72 stands as a timeless tool for investors, offering a simple yet powerful method to estimate the time it takes for an investment to double. Through its straightforward application, individuals can make informed decisions about their financial futures. Whether planning for retirement or assessing investment opportunities, understanding this rule empowers investors to strategize effectively. By integrating the Rule of 72 into their financial toolkit, individuals can navigate the complexities of investing with greater confidence and clarity.
