Series: Saving and Investing

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Wanna Double Your Money? Terms of Use:

The Rule of 72 is a handy way to figure out how many years it takes for your money to double if you invest it at a fixed rate of interest, and let compound interest work for you. It’s easy to do, and it’s what people did before they had hand-held calculators.

What you do is divide 72 by the expected interest rate. The number you get is how many years it will take for your money to double.

The following examples illustrate the power of compounding interest and giving your money time to grow. We’re assuming for sake of example that the interest is compounded annually (once a year). Compound interest means the return you receive on your initial investment remains in your account so you earn interest on your interest.

Let's imagine you have $1,000 earning 4% interest. Using the Rule of 72, you divide 72 by 4, and get 18. In 18 years, you’ll have $2,000. Instead of 4% interest, let’s say you're earning 6% interest, then it’ll take only 12 years to double your money. At 10% interest, it’ll be 7.2 years.

The Rule of 72 gets even more useful if you think in terms of your money doubling and redoubling. If it took 18 years for your money to double at 4%, how long until it doubles again?

According to the Rule of 72, if you have $2,000 in 18 years, then you’ll have $4,000 in another eighteen years, $8,000 in another eighteen years, etc. You can quickly see how your money can double multiple times -- a $1,000 investment can grow to $16,000 by doubling four times (a 16-fold increase!).

You can also use the Rule of 72 to estimate the interest rate you need in order to double your money in a certain number of years. Simply divide 72 by the number of years to get the interest rate you must earn in order to reach your goal.

Another use for The Rule of 72 is show how the difference of just a few points in an interest rate can make a big difference in how quickly your money grows.

Series: Saving and Investing

Page 2 of 2

Wanna Double Your Money? Terms of Use:

Here’s an example: Bank A offers a money market account at 5% interest and Credit Union B offers a money market account at 6% interest.

Over 40 years, your $10,000 investment that earns 5% (compounded annually) is worth $70,400. Invested at 6%, your $10,000 becomes $102,857 – so that 1% difference in rates gave you an extra $32,457 at the end of 40 years.

This slight difference in interest rates also points to the importance of shopping for the best loan rates and credit card programs. As shown, a few points difference in interest on credit cards and other loans can work very quickly and dramatically against you.

Let's say you have $2200 outstanding balance on your credit card, which charges 18% interest. If you don't make any payments, your balance will double in 4 years! If your credit card charges 22% interest, it will only take 3.3 years for you to owe twice the balance!

Einstein is credited with developing the Rule of 72. The real math formula looks like this:

P(1 + r/100)^n

In this formula, P is principal or the original amount of money; r is interest rate; and n is the number of years. When this formula is applied, the Rule of 72 actually becomes the rule of 7.2725527.

The Rule of 72 is only approximate, and it does have some margin of error.

Because of the margin of error, the Rule of 72 works best at interest rates under 50 or so. But since most people do not run into interest rates over 50%, the Rule of 72 is a very neat trick to know.

The average stock market return since 1926 has been about 11%. Now that you know the Rule of 72, you can figure that your stock market investment will double in 6.5 years (if returns continue at historical levels).

You might hear someone say their investment is a “two-bagger” which means they’ve doubled their money. Now you can use the Rule of 72 to figure your money doubling strategy, too!

See what you learned.

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