“Compound interest is the 8th wonder of the world. He who understands it,
earns it; he who doesn’t, pays it.” – Einstein
As you begin saving and investing your money, one important piece of information is projecting the growth of your investments.
One very simple and easy to remember tool is the Rule of 72. The rule calculates how many years it will take you to double your money for any given yearly rate of return.
The Simple Rule of 72
Here is the rule: Start with the number 72. Divide it by the yearly rate of return on your investment. The result is the number of years it will take for your investment to double.
For example, your CD has an annual return of 3.0%. Take 72 and divide it by 3.0. The result is 24. It will take 24 years for your CD to double in value. (Hint: that is a long time!)
Twist the Rule of 72 for More Answers
You can also twist the formula a bit and find out what interest rate you need in order to double your money in a specific number of years. To find this out, divide 72 by the desired number of years.
For example, say you hope to retire in 12 years. You have $200,000 in an investment fund and you want it to be at $400,000 in 12 years. What rate of return will you need to make this happen? To find out, take 72 and divide it by 12. The answer is 6, which means that you will need a rate of return of 6% if you want to double the fund in 12 years.
Rule of 72 for More than Just Money and Years
Of course, you can use the rule for more than just money and years. Here are a couple of examples:
You are just starting out with an exercise routine. Right now you are exercising for 10 minutes each workout. If you increase your workout by 10% a week, approximately how many weeks will it take you to double your time to 20 minutes a workout? Let’s find out! Take 72 and divide it by 10. The answer is 7.2, or 7.2 weeks. Since you are increasing once a week, you will increase above 20 minutes starting at week 8.
Another example: You teach a monthly seminar to a class of 25 people. That’s nice but you want your class size to increase to at least 50 people over the next 6 months. What percentage increase do you need each month in order to double your class in 6 months? Get our your trusty Rule of 72 and let’s go! Take 72 and divide it by 6. The answer is 12. You will need to increase by at least 12% each month. (In this example, you’ll have to keep in mind that you can only add whole people to your class each month. If your 12% increase says that you should add 3.8 people for a given month, in reality you will have to add 4 people.)
Cool, huh? A simple, effective tool to help you plan and evaluate your investments and more. Now that’s The Fat Dollar way.