Investment

Rule of 72: How Long Does it Take You To Double Your Money?

Let’s not beat around the bush – Investing for the first time is a daunting concept.

The majority of us, especially younger millennials, at some point or another have had apprehensive feelings just thinking about investing. Whether it be due to the fear of possibly losing your hard-earned money or the stress of making a mistake on an investment you don’t really understand. Investing can be scary!

Having highlighted to you in my last blog post the concept of compound interest (The Eighth Wonder Of The World: Compound Interest) and the astonishing power that it has on growing your hard-earned money exponentially over time, I wanted to follow it up with a simple shortcut for you to lessen those fears when you are analysing investments (no scientific calculators needed!) – I present to you, the ‘Rule Of 72’.

What is the ‘Rule Of 72’?

Simply put, the Rule Of 72 is a handy shortcut to approximate how long (number of years) it takes to double your money given a fixed annual rate of return.

The rule states that you divide the rate, expressed as a percentage, into 72:

RULE: Years required to double investment = 72 ÷ compound annual interest rate.
Example – ‘Rule Of 72’

Jessica is considering investing in one of two share portfolios. Portfolio 1 provides an investment rate of return of 6% compounding annually and Portfolio 2 returning 10% compounding annually. She wants to know how long it will take her to double her money?

HUH! What is “ln”, “t” and “r”?! As promised, there will be no calculators required!

The Rule Of 72 can accurately provide the answer for Jessica with a lot less confusion.

Portfolio 1: 6% compounding annually.

RULE: Years required to double investment = 72 ÷ compound annual interest rate.

72 years/6% = 12 years to double her money.

If we used that fancy logarithm maths above, the answer would give us 11.9 years!

Portfolio 2: 10% compounding annually.

RULE: Years required to double investment = 72 ÷ compound annual interest rate.

72 years/10% = 7.2 years to double her money.

Again, if we used that fancy logarithm maths above, the answer would give us 7.3 years!

By simply implementing the Rule Of 72, Jessica can quickly estimate how long the initial investment of each portfolio will take to duplicate itself.

 Pros of using the rule:
  • Conveniently, 72 is divisible by 2, 3, 4, 6, 8, 9, and 12, making the calculation even simpler.
  • Good approximation for the interest rates we will deal with the rest of our lives.
Cons of using the rule:
  • For low interest rates, the Rule Of 72 slightly over estimates and for large interest rates, the Rule Of 72 slightly under estimates.

Below I have provided a “cheat sheet” for you to refer to when analysing an investments rate of return and seeing how long it will take you to double your money.

Takeaway:  

The Rule Of 72 is fairly accurate in estimating an investment’s doubling time. The higher the compounding interest rate, the less years it will take your money to double. The lower the compounding interest rate, the more years it will take for your money to double.

Don’t let fear investing prevent you from financial success. Use the ‘Rule of 72’ to help you with every investment decision you make into the future.

One thought on “Rule of 72: How Long Does it Take You To Double Your Money?

Leave a Reply

Your email address will not be published. Required fields are marked *