Let’s be honest, when we decide to invest, we are doing it to make money. One of the biggest questions you may ask your self is how long will it take for my investment to double? This is where the “Rule of 72” can be helpful.
The Rule of 72 makes estimating the time frame needed for your investment easy to calculate. All that is needed for this estimation is one math problem. Simply divide 72 by the interest rate (percentage) you anticipate you will earn.
For something like a Certificate of Deposit (CD) where the interest rate is fixed, such as 2%, we can the use of the rule is much easier. You would simply divide 72 by 2 and end up with 36. Therefore, investing with a $1,000 CD that earns 2% would take 36 years for the CD become $2,000 in value.
Other investments, such as with stocks or funds, do not have a fixed interest rate. This is where some additional estimation comes into play. Suppose you believe you will average 8% to 12% in the stock market. Using the Rule of 72, we will find that it will take you between 6 and 9 years for your money to double.
The Rule of 72 is not totally perfect though. As its easy of use dictates, it provides an estimate. The following table reflects the difference from the rule and actual time frames.
Rule of 72 Table of Calculations:
|Interest Rate||Rule of 72 Time Frame||Actual Time Frame|
I wish you much success with your investing. Remember, there is typically higher risk associated with higher interest rates. Past performance does not equate future gains. Always structure your risk to reward at a level you are comfortable with.