It can be difficult to get motivated to save and invest if you don’t know how quickly it will increase your personal wealth in the future. Will you have to wait 10 or more years to see your money double? Or could it be sooner?
The Rule of 72 is a simple way to help you estimate how long an investment (or putting your money in a high-yield savings account) will take to double with a given fixed annual rate of return.
Before we jump into the math (and we promise it’s simple!), let’s define some terms you’ll need to understand.
An “annual rate of return” is the amount of money earned on a savings deposit or investment and takes into account the effect of compounding interest. This is also called “APY” or “annual percentage yield.”
“Compounding interest” is interest calculated on the initial investment of money you put into an account (called the “principal”) plus any accumulated interest from previous compounding periods. Think of it as earning interest on interest. This will grow your money faster.
Here’s how much a $10,000 deposit in a savings account earning 8% compound interest, compounded annually, would earn in three years:
Interest earned in year one: .08 x $10,000 = $800
Interest earned in year two: $800 + $10,00 = $10,800
.08 x $10,800 = $864
Interest earned in year three: $10,800 + $864 = $11,664
.08 x $11,664 = $933.12
For the Rule of 72, you assume the interest is compounded annually (once a year) and that you leave the money you earn through interest in the account. You’re essentially reinvesting the money you make in interest to grow your money faster.
Now for the Rule of 72 math: divide 72 by the annual interest rate to find out how long it will take to double your money. That’s it! Well, with some clarifications.
This rule is most accurate when using lower interest rates (most accurate between 7% and 12% interest rates). However, this usually isn’t a problem as the most common, long-term investments are close to these rates of return.
Here is an example of the Rule of 72 at work:
- If you invest at a 7% return, you will double your money every 10.2 years. (72÷7 = 10.2 years)
- If you invest at an 8% return, you will double your money every 9 years. (72÷8 = 9 years)
- If you invest at a 9% return, you will double your money every 8 years. (72÷9 = 8 years)
These numbers can give you a good idea of how quickly your money will double in an investment. Hopefully it gives you the courage to ask more questions from an investment advisor, financial planner, or credit union savings specialist on how to get started investing and saving today!Go to main navigation