Want to know how long it will take for your invested money to double? The Rule of 72 is an easy way to calculate how many years it will take until your money doubles. The Rule of 72 shows the powerful impact of compounding interest, the hidden force behind growing wealth.
How to calculate The Rule of 72
72 ÷ rate of return = years for money to double
For example, if you are expected to get a 12% return in the market, you take the number 72 ÷ 12 = 6 years for your money to double. This means every 6 years the total amount in your account doubles! Following these calculations, you can see the effect of 3% rate of return, 6% rate of return, and 12% rate of return using the Rule of 72 starting at age 20.
|Rule of 72|
This is an easy equation to keep in the back of your mind next time you make a purchase. Every time you think of making a big buy consider the Rule of 72 and how much you could make if you invest your money instead. For Example,
Buying a Used Car Instead of a New One and Saving $5,000 in the Process.
|Saving $5,000 with the Rule of 72|
For someone looking to buy a new car when they could get a perfectly good used car for a cheaper price, this may have an important impact on you. Buying the used car and saving $5,000 – for 24 years, if invested at 12% return, can result in a $80,000 gain! Now you could retire with a really nice car. You technically didn’t spend any more money than you planned on, but by saving a portion of it you get a very nice return in 24 years.
If you didn’t notice, the earlier you invest the better. After 24 years of waiting, if you wait just another 6 years $80,000 will double $160,000 – a HUGE difference in just 6 years!
It’s important to know that returns can vary depending on when you withdraw your money. Getting a 12% return means an average of 12% in the long run. The market can go up and go down in the short-term, but long term trends average around 10-12% return.
The Rule of 72 is an estimate of how many years it takes for your money to double. When I run the numbers from the example above (saving $5,000 buying a used car) using a Time Value of Money Calculator I get:
- Initial investment of $5,000 for 24 years at 3% return = $10,163.97
- Initial investment of $5,000 for 24 years at 6% return = $20,244.67
- Initial investment of $5,000 for 24 years at 12% return = $75,893.14
So, as you can see the equation is a pretty close estimate to what the Time Value of Money Calculator gives you and more importantly, easier to remember!