The Rule of 72

by Joseph · 2 comments

in Finance 101

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I’m a huge fan of math tricks, especially when it makes solving complex issues just a little bit easier. There’s a great trick that can be used to easily figure out how long it will take compounding interest to double your investment: it’s called The Rule of 72.

This is an easy trick. You simply divide 72 by your interest rate to solve for the number of years that it will take your initial investment to double in value.

Let’s take a look at a few examples. At my credit union the savings account pays 1% interest, so 72 divided by 1 is 72 – it will take an investment of $1,000 (or any amount) 72 years to double at a rate of 1 percent. On the other hand the current rate on the Orange Savings Account at ING Direct is 2.4%. So 72 divided by 2.4 is 30 – or in other words it will take 30 years for my investment to double if I were to place it in the Orange Savings Account.

See how much of a difference a small percentage increase can make? Let’s really have some fun with this now. If you could manage a return of 10% annually you could double your initial investment in 7.2 years! Or if you could manage a return of 15% you would be able to double your investment in 4.8 years!

The Rule of 72 can also be used to calculate a interest rate you’ll need to double your money in a certain amount of years. For example let’s say you want to double your money in 3 years. So divide 72 by 3 and you’ll come up with 24, which means you’ll need to earn a return of 24% in order to double your money in 3 years.

{ 1 comment… read it below or add one }

Kristy @ Master Your Card January 27, 2009 at 11:23 pm

I love this rule! It is one of the best tools in a personal bankers arsenal because it really gives us a concrete way to show members/customers how their money will work for them. As a matter of fact, I used this example the other day with a member. He had an abundance of money sitting in his membership share account that’s earning 1%. For the amount of money he had, he would be earning 3.75% in a money market account that’s just as insured as his membership share and would take about 5 minutes of his time to switch over. He didn’t think 2.75% would make much of a difference until I used the rule of 72 and actually showed him just how much of a difference it made. He switched.

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