We all want to double our money right? There’s a simple formula called the Rule of 72, that can help figure out how long it would take to double your money at a specific interest rate. The rule of 72 is a popular mathematical shortcut and easy concept for investors to understand.
How to compute
If you want to find out how long it takes to double at a specific interest rate, the rule of 72 is the fastest way to do so. To find out how long it will take to double your money, divide 72 by your rate of return and you will have approximately the number of years needed.
72 ÷ your compound annual interest rate = how many years until your investment doubles
Examples
2% = 36 Years
4% = 18 Years
6% = 12 years
8% = 9 years
12% = 6 years
Think Long Term
People often think that lack of volatility equals safety. Many people have too much money in cash, bonds, annuities, CDs, etc. Investing for a low rate of return basically guarantees your money isn’t going to grow significantly. If your money sits in a standard savings account that earns 0.09%, it would take 800 years to double. Nobody knows what the market is going to do short term, but if you are investing for the long term there are better options when it comes to growing your wealth.
Owning stocks is risky in the short run, but not owning stocks is risky in the long run
Start Early
The only way to benefit from the rule of 72 is to invest your money! You need to find balance in spending money that will bring you happiness, but at the same time know how to avoid unnecessary purchases. Not starting to save early enough will hinder you from experiencing the benefits of compound interest.
As you can see from my previous post, the earlier you invest the longer you can benefit from compounding interest. As an investor, time is your greatest asset. The sooner you invest, the closer you can be to financial independence.
Other Applications
The rule of 72 applies to all types of interest. Using the formula, you can find out how many years it will take for your money owed to double. For example, if you take 72 and divide by 18% (credit card interest rate), it will take 4 years for the credit card company to earn double your money.
Another use could be for evaluating inflation. The average inflation rate in the United States is around 3%. By using the rule of 72, we know that a 3% return doubles every 24 years. Meaning any savings not invested will lose half their value to inflation every 24 years. You still need growth even in retirement.
Knowing how these interests rates affect your money will help you with your goals based financial plan. If you have any questions or would like to start building your financial plan, please do not hesitate to reach out.
George Maroudas
george@pmgwealth.com
847-550-6100
Twitter @ChicagoAdvisor
Disclaimer & Definitions:
Inflation: an economic term describing the sustained increase in prices of goods and services within a period.
Compound interest: is interest earned from the original principal plus accumulated interest. Not only are you earning interest on your beginning deposit, you’re earning interest on the interest.
Interest rate: is both the cost of borrowing funds and the profit that accrues to those who deposit funds in a savings account
The rule of 72 is a mathematical concept and does not guarantee investment results nor function as a predictor of how an investment will perform. It is an approximation of the impact of a targeted rate of return. Investments are subject to fluctuating returns and there is no assurance that any investment will double in value.
Stock investing includes risks, including fluctuating prices and loss or principal. This information is not intended to provide specific advice or recommendations about any stock nor is it intended to be a recommendation to buy, sell or hold any stock investment. We suggest speaking with your financial professional about your situation prior to investing.
Please consult your financial advisor regarding your specific situation. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy ensures success or protects against loss. This information is not intended to be a substitute for specific individualized tax advice. The Standard & Poor’s Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
