This rule is a handy one to know when investing.
While a lot of online calculators already have this inputted into their calculations and it would be an easy matter for you to use them instead, it is handy to know how to do it yourself, and it is pretty easy anyway.
What is the Rule of 72?
It’s simply a rule for calculating when an investment doubles. Assuming you add nothing more to an initial investment, this rule will tell you, based on the interest rate used, when that investment will double in value, in years.
Please note that the rule assumes that you are using compounding interest and not simple interest, but I would say every savings account and investments uses compounding interest these days so it is a safe bet that yours does too.
The Formula
Calculating this rule is pretty easy, you simply divide 72 by the interest rate (given as a percentage).
To give a simple example, say you had $100 in an online bank account at 4.5% (assuming the interest rate stayed the same over that time – I said it was a simple example) it would take approximately 16 years for that money to become $200.
72 Isn’t Accurate
Now, I say approximately because the Rule of 72 isn’t all that accurate. It’s close but not exact. The Rule of 69 is a lot more accurate, but 72 divides into a lot more numbers cleanly than does 69, which is why it is used; and for small or approximate calculations it works just fine. So feel free to substitute 69 for 72 when doing this calculation.
If you want to be even more exact, use the number 69.3 – as that is even more accurate than 69.
To use our example above with the more accurate number of 69.3, we get a more accurate answer of 15.4 years, or 15 years and 146 days.
As you can probably tell, for this calculation it doesn’t really matter what the amount of money invested is. It will work with any amount at all.
Image Credit: stuartpilbrow
Author Info
This article was written by Russ – the founder of MonoMoney.com and total geek. Feel free to contact him via this website and let him know how well he is doing. Or just leave a comment below.
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