The Rule of 72 lets you estimate, with a fair degree of accuracy, how long it will take a lump sum investment to double at a given rate of interest.
Whilst it may not be 100% accurate, it gives you a good back-of-the-envelope rule that may keep you from celebrating 5% investment returns.
And it's a blast for figuring how rich you will be in 20 or 30 years.
The rule is simple. Divide 72 by the rate of interest and you have approximately the number of years of doubling your investment:
72 / x% = years to doubling
Like any rule of thumb, this one has its limitations, and in this case is increasingly inaccurate once you get much above 15%, although it's still a pretty good measure.
And frankly, if your investments are compounding regularly at above 15%, the minor inaccuracies will be irrelevant anyway.
Here's an example:
$10,000 invested at 8.5% will take 72/8.5 years to double = 8.47 years.
Looked at another way, if you know the doubling time, divide it into 72 to get the growth rate.
Using the same example as above:
72 / 8.47 years = 8.5%
This idea of doubling is a very powerful one. It might be stating the obvious, but the quicker you can double your money, the more you'll end up making.
For example, in close to 34 years, $10,000 doubling every 8.47 years will turn into $160,000.
But if you managed to make a compounded annual average return of 11% per annum, in close to 33 years your $10,000 would turn into $320,000.
Didn't we tell you this would be fun?
For even more fun, be sure to check out The Miracle of Compound Returns.
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