The Rule of 72
Written by R. A. Stewart
When investing your money there is a formula for calculating how long it will take your money to double. this is known as the Rule of 72. It is a quick, useful mental math shortcut used to estimate how long it will take an investment to double in value at a fixed annual rate of return.
Here is how it works:
The Formula
Divide 72 by the rate of interest or the expected rate of return per annum.
Note: When using this formula, you use the percentage as a whole number, not a decimal. For example, for a 6% return, you use $6, not $0.06
How It Works (Examples)
- At a 6% return:
72 divide by 6 = 12
Your money will take approximately 12 years to double. - At an 8% return:
72 divide by 8 = 9
Your money will take approximately 9 years to double. - At a 12% return:
72 divide by 12 = 6
Your money will take approximately 6 years to double.
Reversing the Formula
You can also flip the formula to find the interest rate required to double your money within a specific time frame:
72 divide by 3% = 24
If you want your money to double in 24 years, you need a 3% return
72 divide by 7.2% = 10
If you want your money to double in 10 years, you need a 7.2% return
Why 72?
The number 72 is used because it has many low divisors ($2, $3, $4, $6, $8, $9, $12), making the mental math incredibly easy.
Mathematically, the exact number for natural log-based compounding is closer to $69.3, but $72 provides a remarkably accurate approximation for typical investment returns (between 5% and 12%) without needing a financial calculator.
Here is an example of how your money can double using the Rule of 72 Formula.
Expected return per annum (per year) is 8%
Maria has $1,000 to invest and she has decided to invest it in kiwisaver at an expected return of 8%.. Here is a breakdown of how this initial investment will grow.
Age Investment Age Total
18 $1,000 27 $2,000
27 $2,000 36 $4,000
36 $4,000 45 $8,000
45 $8,000 54 $16,000
54 $16,000 63 $32,000
63 $32,000 72 $64,000
When an investment is left to compound it means that the interest or dividends are added to the original investment which means that you are earning interest fro the interest.
This is how kiwisaver fortunes are being made.
At the other extreme, Jasmine invests $1,000 at the age of 18 but instead of just leaving the interest with her $1,000 investment she gets her interest or dividends paid into her bank account to spend. The spending power of her original investment of $1,000 has been eroded by inflation over the years. This means that her $1,000 if she were to spend it when she retires would not go as far as her original $1,000.
Example
Age Investment Age
18 $1,000 27 $1,000
27 $1,000 36 $1,000
36 $1,000 45 $1,000
54 $1,000 63 $1,000
63 $1,000 72 $1,000
Retirees who have built up a good nest egg sometimes like to have their interest and dividends paid to them to help with day to day living costs but this is not suitable for the young ones who seek to build their wealth over time.
About this Article
The information in this article may not be applicable to your personal circumstances, therefore discretion is advised. You may use this article as content for your website, blog, or ebook.
Read my other articles on www.robertastewart.com
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