Find Jobs

What Is the Rule of 72 and Why Should You Care About It?

Rule of 72

What Is the Rule of 72 and Why Should You Care About It?

Everybody loves the idea of doubling their money. But did you know there’s a simple formula that can help you understand how long it will take for your money to double?

It’s called the “Rule of 72.” For the purposes of this article, I’m going to introduce you to a simple Rule of 72 definition.

What Is the Rule of 72 and Why Should You Care About It?

I’m also going to show you how long it will take different amounts between $1,000 and $100,000 to double at a few common historical interest rates of growth.

What Is the Rule of 72?

If you’re looking for a simple explanation of the Rule of 72, here it is:

The Rule of 72 says you can divide 72 by any interest rate to find out how long it will take your initial investment to double while growing at that interest rate.

So, for example, let’s say you have $12,000 invested at 6% interest. Under those conditions, it will take your money 12 years to double to $24,000 — assuming you make no additional contributions.

The math here is easy: 72 divided by six (the interest rate) equals 12 (the number of years to double).

Or, let’s say you have $18,500 growing at 7% interest annually. Then it will take about 10 years and three months for your money to multiple twofold to $37,000. Here, the math is 72 divided by seven equals 10.28.

READ  Reasonable Consumption: How to Spend Money Wisely

As you can see, it’s not the principal that matters when you’re crunching numbers using the Rule of 72: it’s the interest rate.

Ultimately, the Rule of 72 is just a quick back-of-the-envelope way to understand how long it will take your investments to double.

As a rule, it has applications beyond just investment money. The Rule of 72 also works for anything else that grows over time — like inflation or even world population.

Common Examples of the Rule of 72

Saving and investing, as you probably know, are long-haul pursuits. It takes dedication and perseverance to do either one. Nowhere does that become more apparent than when you see how long it can take your money to double.

Let’s say you start out with a nest egg of $1,000 that’s making annual investment returns of 4%. If you never contribute another penny to that stash, the power of compound interest growth means it will take 18 years to double to $2,000. That’s because 72 divided by four is 18.

Eighteen years is a long time!

Now let’s say that same $1,000 was earning 8% interest annually. Then it would only take half the time, or nine years. In this case, 72 divided by 8 equals nine.

Our table below takes a look at how long it would take nest eggs of $1,000, $5,000, $10,000, $25,000, $50,000 and $100,000 to double at various interest rates.

What Is the Rule of 72 and Why Should You Care About It?

Again, we’re assuming no future contributions to your nest. Additional contributions would speed up your growth rate considerably beyond what you see below.

READ  11 tips on how to pass interview successfully
Initial Investment4% Compound Annual Interest6% Compound Annual Interest8% Compound Annual InterestFinal Amount
$1,00018 years12 years9 years$2,000
$5,00018 years12 years9 years$10,000
$10,00018 years12 years9 years$20,000
$25,00018 years12 years9 years$50,000
$50,00018 years12 years9 years$100,000
$100,00018 years12 years9 years$200,000

Final Thought

You’ve probably heard the saying, “Money doesn’t grow on trees.” While that’s certainly true, the Rule of 72 may be the next best thing. It offers a simple way for you to quickly estimate how long it will take your money to double.

As you can see, it can take a long time! That reinforces the idea that you’ve got to save additional money over the long haul.

Share this post with your friends, and Join our community on Telegram