The Rule of 72
The Rule of 72 is an easy investing rule of thumb that tells you how long it will take to double your investment. It is very practicable to illustrate the effect of compound interest. The concept of compound interest is easy to understand and the Rule of 72 makes it very easy to calculate.
"Compound interest is the greatest mathematical discovery of all time."
Albert Einstein
To use the Rule of 72, divide 72 by the interest rate of your investment. This will tell you how long it takes your money to double. For example, let us assume your growth rate is 8%, your calculation will look like this: 72/8 = 9 years.
| Rate of interest | Years to double |
|---|---|
| 1% | 72 |
| 2% | 36 |
| 3% | 24 |
| 4% | 18 |
| 5% | 14 |
| 6% | 12 |
| 7% | 10.3 |
| 8% | 9 |
| 9% | 8 |
| 10% | 7.2 |
| 11% | 6.5 |
| 12% | 6 |
| 13% | 5.5 |
| 14% | 5.1 |
| 15% | 4.8 |
You can do this with any percentage you want. I illustrated the basic calculations at the table on the left side for you. You see, even 1% difference can save you a lot of time to reach your goal. Compound interest is really one of the most fascinating phenomena of the financial world and you should definitely take advantage of it.
Please keep in mind that the results of the Rule of 72 are not exact but they very close, so for most cases it will be just fine. Normally, you also will not get a constant interest rate, especially if you invest in stocks or similar investment forms. Important variables like taxes and inflation are also not included in the Rule of 72. However, this rule should enable you to quickly calculate the growth of your investment without using a calculator.
Never forget, time can be on your side, or not. So invest early in long-term investments, because the sooner you start, the more money you will have.