You want to amaze your friends, and wow your colleagues? Learn the rule of 72. This is one of the cooler parlor tricks in the world of investing and personal finance. Well, perhaps it's the only one.
It's simple to learn, and requires minimal math skills to execute.
What does it do? It allows you to quickly calculate how long it will take your money to double, based on any growth rate. All you do is divide 72 by the interest rate or rate of growth.
I know, I know. We're all much more sophisticated than that. We all know how to do future value calculations on Excel, or our financial calculators. Or Number of period (NPER) calculations. However, what about this situation?
You're sitting in a bar, and your buddy says, you know I have the money from my inheritance in a bond fund that has been averaging 6%, I know that stocks average about 10%, but it's just not enough money. I need about double what I currently have.
Well then, you can whip out your HP10bII, or load up your laptop, or you can amaze your friends with the rule of 72.
How long will it take for his money to double at 6%? 72/6 = 12. So, about 12 years. And how long will it take for his money to double at 10%? 72/10 = 7.2. So, about 7.2 years. How accurate is the rule of 72? Well, the real answer, if you plug it into Excel, is 11.896 years at 6%, and 7.2725 years at 10%. So, I'd say for something you can do in your head, it's a great guideline.
Also, if you have one of those guys who thinks saving is for chumps because it will take too long for your money go become anything significant, you can do more than double with this trick. Let's use a growth rate of 12% ( you can certainly make the argument), well, using the rule of 72, you know that his money will double in 6 years (6.116 to be accurate). Based on that you can say, with $10,000 today, you will have $20,000 in six years, and doubling that for six more years $40,000 in twelve years. In 18 years his money will double again to $80,000, and $160,000 in 24 years. $320,000 in 30 years, and by the time he is retired, 36 years from now, he will have $640,000!
The rule of 72 works best for moderate returns between 3-15%. If you are calculating very high returns, it skews things weirdly. For example, if you had a 100% return, the rule of 72 tells you that your money will double in .72 years, when we all know that it will double in one year.
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