I have to give my father credit for teaching me this rule in my younger days, as I still use it today. It has proven so useful for me, that I am eager to share it with you. The number 72 is special because it can help you when earning interest on your money. Have you ever wanted to know how long it would take your money to double if it grew at a rate of 1%, 10% or even 30% per year?
The rule of 72 can help get you close to the actual number of years. It gives you a rough estimate, which is great for quickly thinking through different scenarios. For example, let’s say you have $10,000 in your bank account, and the bank promises to pay you an interest rate of 1% per year. How long would it take for your $10,000 to double? Let’s use the rule of 72. First you take 72, and divide it by your interest rate, 1% in this case. 72/1 = 72 years!
Now let’s look at the same amount of $10,000, but instead you decide to invest it in an index fund or a corporate stock that grows at a rate of 10% per year. How long would it take to reach $20,000? Using the rule, take 72 and divide it by the interest rate of 10%. 72/10 = 7.2 years. Below is an example showing the exact amounts for 8 years. In slightly more than 7 years, the $20,000 mark is reached, proving that the rule of 72 gets you close to the actual numbers.
The third example as you can guess will look very extreme. Have you ever wondered how the rich get richer? Well, if you can grow your $10,000 at 30% per year, how long will it take to double? 72/30 = 2.4 years. If you can find ways to grow your money at rates like this, you will find yourself being a part of the “richer” crowd someday soon!
You can also use the number to back-calculate a target interest rate. Let’s say you want your money to double in 10 years and want to find out what interest rate you will need to achieve every year. Using the rule, you would take 72 and divide it by 10, which would give you 7.2% Below is a table showing the exact numbers, proving that the rule of 72 is a good estimate:
Pretty amazing, right? Use this rule of 72 to help yourself invest wisely and build wealth.