Have you ever wanted to know what investment return (or interest rate), you would need to double the size of your investment? Welcome to the Rule of 72
By understanding the Rule of 72 you can make fast calculations, in your head or the back of an envelope, to know what investment return you’ll need each year to double your investment.
The Rule of 72 in action
By understanding the Rule of 72 you can quickly determine:
- The rate of return required for an investment to double in value over a pre-defined number of years
- If you know the given rate of return on your investment, you can quickly determine how long it will take for your investment to double in value.
Lets have a look at some examples
1 – What rate of return do I require for my investment to double in 10 years?
Divide 72 by the number of years. For this example it is 72/10 = 7.2. You will need a return of 7.2% each year.
2 – I Want my investment to double in 6 years – What rate of return do I need?
Divide 72 by 6 = 12. You will need 12% each year
3 – The real estate salesman told me that house prices in this location have doubled over the last 15 years. What has been the investment return?
Divide 72 by 15 = 4.8%
4 – I’m earning 4% on my bank deposit, how long will it take for my investment to double in value?
In this example you divide 72 by the interest rate. 72/4 = 18 years
5 – The inflation rate is expected to be 3%, what will that mean for my investments?
Divide 72 by the inflation rate of 3%. 72/3 = 24. This means that an investment of say $100 will need to be worth $200 in 24 years just to keep up with inflation.
Some details you need to know
As you can see, the math is quite simple to understand after a bit of practice. However, there are two important factors to note:
- The rate of return using the rule of 72 is the net return. This is the return after deducting taxes and fees
- The results are based on yearly compounding returns. This means the investment return is added to the initial investment each year.
As you practice, you will be able to do most calculations in you head and if that’s a bit hard, the calculator on your phone.
We probably shouldn’t say this, but we will – The Rule of 72 makes you look very smart when discussing investments at dinner parties or over a barbecue!