I haven’t posted a lot about personal finance lately, and I’ve been meeting to get back on the horse soon. In the meantime, this is a fun one for those of you who may not have heard it before.
When investing for a long term goal, like college or retirement, it’s often very useful to be able to quickly determine how long it will take to double your money.
Enter the Rule of 72.
Now, the Rule of 72 is shorthand, and not completely accurate. But it’s accurate enough to be immensely useful.
The Rule of 72 says that if you divide 72 by the rate of return on an investment, you’ll get the number of years required for that investment to double.
So, if you find an investment that returns 8%, 72 / 8 = 9, so the investment will take 9 years to double.
I learned this rule about 15 years ago from my grandmother, and I’ve been using it for quick shorthand ever since.
For example, let’s say I want to know how much a $50K 401K might be worth over time. Assuming an 8% rate of return, I can quickly determine that it will double in 9 years, quadruple in 18 years, octuple in 27 years, and be worth $800K in 36 years.
This also works, unfortunately, for loans, but in reverse. If you take a student loan out at 7.2% for 10 years, well, you can expect to end up paying double what you borrowed in total.
I’ve also used this rule in business environments, especially when you are looking at compounding growth rates for business metrics like sales, revenue and costs.
Once again, the rule is really a shorthand, and not completely accurate. Obviously, a 72% return doesn’t double in 1 year. And a 1% return doesn’t double in 72 years. However, it’s surprisingly accurate in the middle ranges, which apply to most situations.
This article in Get Rich Slowly has some variants that are fun. But for me, the basic Rule of 72 lets me quickly an easily assess what a return will really mean to an investment, in those rare moments when I’m away from Excel.
So enjoy this tidbit, and I’ll get to some meatier topics this week.
Psychohistory 