There’s a very easy way to tell the amount of time it will take to double your money and it’s called the Rule of 72. Getting a sense of how compound interest can potentially grow your portfolio is enough to light a fire under you and get you started saving as early as possible. I use the Rule of 72 all of the time, and chances are, if you’ve listened to my podcast or read either of my books, you’ve heard me use it.
Knowing how long it takes to double your money, tells you what your compounded rate of return is over time. Watch the video below to learn more.
Rule of 72 Video
What is the Rule of 72?
The Rule of 72 is a simple equation to help you determine how long an investment will take to double given a fixed interest rate. It’s a shortcut that investors use to estimate if an investment will double your money quickly enough to be worth pursuing.
Here’s how the Rule of 72 works:
At 10%, money doubles every 7.2 years and when you divide 7.2 by 10%, you get 72.
This rule of thumb helps you compute when your money (or any unit of numbers) will double at a given interest (growth) rate.
Rule of 72 Example
For example, if you want to know how long it’ll take to double your money at 9% interest, divide 9 into 72 and get 8 years.
You can also do the reverse, and solve for the interest (growth) rate.
For another example, if your money has to double in two years so you can buy your significant other a trip to Europe, you’ll need (72 / 2 = 36) a 36% rate of return on your stash. Remember, the Rule of 72 is an approximation, but it’s a remarkably accurate one we can use with confidence for our Rule #1 calculations.
The exact number of years it takes to double once at a 24% growth rate is 3.2 years, which is to say that the Rule of 72 is very accurate around 10% but gets less accurate the farther from 10% we go.
However, for our purposes, the Rule of 72 is close enough since we shouldn’t be buying anything that’s marginal anyway.
At a 24% growth rate, we know we can expect our money to double 3 times in about 10 years.
Let’s do the math: $1 doubles to $2 in the first three years; $2 doubles to $4 in the second set of three years, and $4 doubles to $8 in the third set of three years. Thus, we’d expect the future EPS (in ten years) to be something like $8 per share.
Why You Want to Learn This Formula
Using the Rule of 72 is a great way to help people understand how much compound interest can help accelerate their savings. It also helps to show the value of starting to save for retirement earlier. If your money could double every 10 years, you’ll have much more time to grow it if you start investing sooner rather than later.
If saving for retirement is scary to you, using the Rule of 72 to get a ballpark number of what you’re going to need to retire might tell you if you need to step up your savings game.
Congratulations, you just did the hardest math you need to do in Rule #1 investing. And if you don’t want to go through these routines, you can rely on my Rule of 72 Cheat Sheet to make things easier.
By the way, here are a few resources to help you along your investing journey:
- Looking for the best way to invest 10,000 dollars?
- Want to learn more from the great Warren Buffett?
- Check out his famous investing quotes here.
- Trying to learn why price doesn’t always equal value?