The Rule of 72
The Rule of 72 is a nifty mathematical computation used to estimate how long it will take a certain sum of money to double at a certain interest rate (assuming the interest is compounded annually). You can use this simple rule to quickly determine how long it will take your savings or an investment to double, or how long it will take a debt to double. Try it out on some of your investments or debts.
The Calculation Is Simple
To calculate how quickly your investment will double, divide 72 by the interest rate or expected rate of return. The result is the number of years it will take your money to double at that interest rate, assuming you reinvest your earnings. So if your money is invested at 8 percent interest, you make the following quick calculation: 72 ÷ 8 = 9. This means it will take approximately nine years.
You can also use the Rule of 72 to estimate what rate of return you'd need to earn in order for your money to double in a certain number of years, for example, ten years: 72 ÷ 10 = 7.2, so you'd need to earn 7.2 percent annually for your money to double in ten years.
It can be fun and interesting to keep track of the money you save by practicing frugality. Try keeping tabs on how much you save each time you make informed buying decisions or abstain from buying an item you would have bought before you came up with your spending plan.
How Many Times Will Your Money Double?
The power of the Rule of 72 doesn't stop there. It illustrates how important differences in interest rates are, because the lower the interest rate, the longer it takes to double your money, and the real key to growing your money is to double it as many times as possible. Look at this example of $100 doubling eight times:
$100 |
$3,200 |
$200 |
$6,400 |
$400 |
$12,800 |
$800 |
$25,600 |
$1,600 |
As you can see, the real growth comes after the money has doubled several times, which is important when you're saving or investing for long-term goals such as retirement. By using the Rule of 72, you can calculate how much you'll have by a certain time and you can compare the long-term effects of interest rates on various investments that you own.
Double Savings, Don't Double Debt
You can use the Rule of 72 to see how long it will take your credit card or other debt to double, too. If you have a $5,000 credit card balance with an interest rate of 10 percent, your debt will double in 7.2 years. If the interest rate is 19 percent, your debt will double in 3.8 years. You can see why it's so hard to pay off your credit card debt, especially if the interest rate is high. If you're only paying the minimum payment each month, it doesn't take long for your balance to double.
