What is the Rule of 72?
Are you considering investing money? If so, you should know about the Rule of 72. It helps you determine how long it will take for your money to grow a certain amount. The Rule of 72 allows you to figure out how long it will take for an investment to double at a given annual rate of return. You can also use it to determine the interest rate you need to find on your investment to have your money double in a certain period of time.
How to Use the Rule of 72
The formula for the Rule of 72 is:
Time = 72/ Interest Rate
In this formula:
- Time is the years for the investment to double
- Interest Rate is the annual rate of return
Rule of 72 Examples
Here is an example of how to apply the Rule of 72. You want to invest $500 at a 6% interest rate. So, it will take your $500 twelve years to double and reach $1,000.
Time = 72 / 6
Time = 12 years
Now let’s look at using the Rule of 72 to determine the interest rate you would need to find in order for your investment to double in a certain time. You want your investment to double five years from now. What interest rate does your investment need to earn to make this happen?
5 = 72/Interest Rate
Interest Rate = 72 / 5
Interest Rate = 14.4%
Your investment would need to grow at 14.4% annually to reach your goal of doubling in five years.
When to Use the Rule of 72
There are many different calculators and Excel operations that allow you to determine the time it will take for an investment to grow to a certain level. The Rule of 72 is still good to know. It offers a simple way for determining how long it will take an investment to double.
And the neat thing about the Rule of 72 is that it can be used in other areas of personal finance as well. You can use it to find out how often the cost of something is doubling if the cost increases at a constant annual rate. You can also use it to determine how quickly inflation will decrease the value of your savings by half. The Rule of 72 is both simple and useful and allows you to think about changes in your investments and costs in a more concrete way.
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Kimbree Redburn is an Accredited Financial Counselor® with a background in economic development. She works with her clients to help them understand their financial options and make money decisions with confidence. She believes that financial education gives people a chance to build a better life.