Rule of 72: How to Double Your Money
What makes investors salivate at the ability to release their money for the unknown potential of what could or may not happen to their money? The uncertainty leaves many in a state of indecision, and impales doubt until the investor makes the leap and devotes money in the market.
Then the day comes where your investment(s) close higher than when you opened your investment position, and you recognize your investment has made some money. From here its brighter days right?
Your initial investment is on its way to doubling.
The compounding of your money will allow your initial investment to grow, and make more money off the returns. One of the best ways to make this happen is to double your initial investment. Now you may be thinking how do I double my initial investment and how long will it take to double your money.
How the rule of 72 works
The rule of 72 is a rule of thumb that gives investors an estimate on when their investment will double. For example, you have 100 dollars you want to invest into the market, and the investment you’re considering has a track record of 11% return over the last ten years.
Therefore if you wanted your investment to grow and double the rule of 72 will help determine the number of years it will take for that investment to double. The equation below demonstrates the rule for how long it will take to double your money in the market.
72 (Rule) / 11 (investment projected return) = 6 ½ years approximately
The above formula takes the rule (72) and divides it by the return percentage. The answer is six and a half years before the money doubles, and this is an approximate value.
So you may be thinking how this rule works. This rule takes into account the impact of compound interest on your initial investment.
Only considering your initial 100 dollars and no additional money added to the investment it will take 6 ½ years to double to 200 dollars. Now for instance let’s take that same 100 dollars and put it in an investment that has outperformed the market over the last 10 years, and have received a return of 40%.
72 (Rule) / 40 (investment projected return) = 2 years approximately
The above equation demonstrates how long it would take your 100 dollar investment to double with a 40% return. Therefore, in two years your investment would double to 200 dollars.
Now just for the sake of increasing the emphasis of this rule let’s say you had 30,000 in a 401K or IRA, and you did not add any additional money to the account how long will it be before your money doubled at a 7% interest rate?
72 (Rule) / 7 (investment projected return) = 10 ¼ years approximately
Therefore, your 401K / IRA would be worth 60,000 dollars in 10 years and 3 months.
Also the rule of 72 can be used for considering inflation.
For example, if we wanted to determine how long before 2% inflation year over year would double it would take 36 years for inflation to double. In other words 100 dollars today will be the equivalent of 200 dollars in 36 years. On the other hand, if inflation is closer to 5% year over year 100 dollars today would be 200 in approximately 14 years .
Table: Rule of 72
The below table is a quick reference tool to determine how the rates of returns and numbers of years are correlated. Use the below table to make conjectures about the years and rate of return percentages.
|Rule of 72 # of years||Rate of Return|
What This Rule of Thumb is NOT
This is just a quick way to calculate the doubling of your investment. This rule is not perfect, but should be used as a rule of thumb for the approximate time frame it will take your money to double.
For example, if I wanted my investment to double in 1 year, and I followed this rule that would mean my investment must gain a 72 percent return in a year correct?
If that is the case a 72% return would mean I have 172 dollars not 200. Therefore, my money did not double.
In this example I would need to receive 100 percent returns to double my money in a year.
This rule is meant to be a quick measuring tool to gauge your returns and the years to double your money.
Do not depend solely on this tool to double your money. There are various contingents you must consider when investing, and aiming for the investments with abnormal returns is the indication of a risky investment and may be a signal of a volatile investment and various market cycles can affect performance.
Always perform thorough due diligence before investing, and do not invest solely for the purpose of doubling your money by X date.
What are your thoughts on the Rule of 72? Let me know in the comments section below.