What is the Rule of 72?
In the financial world, there is a very simple equation you can use to determine how long it will take to double an investment.
You can do this by taking the rate of return you expect on this investment and divide 72 by that number.
If you are assuming a 6% return, it would take you 12 years to double your money.
72 / 6 (% rate of return expected) = 12 (years).
If you anticipate you will get a 12% return, it will take 6 years to double your money.
72 / 12 = 6
You can also use it for something like: I have 4 years to double my money, what rate would it require to make that happen?
72 / 4 (years) = 18 (% required rate of return).
So, you would need to get an 18% return to double your money in your required 4-year period.
If you can only get 4% - that’s a whopping 18 years, ouch!
Rate of return really matters!
As you can see, the number 72 is a consistent throughout each equation.
The number you will divide it by is either the anticipated rate of return, or years to invest.
This will help you to determine your unknown.
This simple rule can be a powerful tool in determining required rate and years to double.
Here is a prior post of mine that expounds on the concept of compounding interest.
It can be applied broadly.
If you are wondering how long it will take your home’s value to double – use the Rule of 72.
If you have a business and need to do a quick estimate on growth, use this rule.
It can be used for anything that deals with compound interest or growth, and can be a powerful tool.
Understanding this simple equation can really help you grow your wealth in profound ways.
Thanks for reading,
Founder of 1911 Apparel