The Rule of 72 : how to calculate your earning doubled.

The Rule of 72

The Rule of 72 shows you how quickly you’ll double your money. All you have to do is divide 72 by the interest rate it's earning. This is the number of years it will take for your money to double.

For example, if your money is earning an 8 percent interest rate, you’ll double your money in 9 years (72 divided by 8 equals 9).

If your money is earning a 5 percent interest rate, you’ll double it in 14.4 years (72 divided by 5 equals 14.4).

If your money is earning a measly 1 percent interest rate, it will take you – yep, you guessed it – a whopping 72 years to double it.

Remember: this is a “rule of thumb,” not an iron-clad law. The Rule of 72 doesn’t adjust for details that make a significant dent in your returns, like taxes and your fund’s administration fees.

However, it’s a useful guide for making a quick mental calculation of how long it will take you to turn $10,000 into $20,000.

Besides, it’s a fantastic reminder of how powerful a single percentage point can be.

The difference between 6 percent and 7 percent doesn’t sound like much. But the difference between doubling your money in 12 years versus doubling your money in 10.3 years sounds a lot more significant.

As a side note, the Rule of 72 assumes that your money “compounds annually” – a term which means that once a year, your interest gets added to your principal and the entire amount is reinvested.

(Interest is the money you’ve earned; principal is the money you’ve started with.)

The Rule of 72 is also a helpful tool to illustrate the power of compound interest – which Albert Einstein reportedly said is the “most powerful force in the universe.”

No comments:

Post a comment