If there's one thing you want to be sure of when it comes to investing and retirement planning, it's that you'll have enough money to meet your financial needs over the long-term. Part of planning and investing involves making calculations that will tell you whether—and how quickly—your money will grow over time.
The Rule of 72 is a simple way to estimate how long it will take your investment to double in size, assuming you reinvest dividends. It's a helpful way to put the time value of money into perspective as you map your retirement and investing plans.
How the Rule of 72 Works
This rule is really very simple. The only thing you need to complete the Rule of 72 calculation is the annual rate of return on your investment.
The Rule of 72 works best for investments that have a fixed rate of return. Most don’t have a fixed rate over a long period of time, but you can use an average estimate to get a pretty good idea of how long it could take to double your money.
- The Rule of 72 is an estimate of how long it will take your money to double at a fixed interest rate.
- This rule is a quick way to compare growth rates between two investments.
- You can also use the Rule of 72 to estimate the purchasing power of your money in the future.
How to Use the Rule of 72
Simply divide 72 by the interest rate. The result is how many years it would take for your money to double at that rate.
Suppose you could earn a 6% rate of return. How long would it take $1,000 to grow into $2,000? Here's the equation:
72 / 6 = 12 years
The rule can be powerful for determining whether there's a gap or potential shortfall in your savings strategy as well. It can help you gauge whether your current savings plan will reach your short- and/or long-term goals.
Your investment would be worth around $2,000 after 12 years if you invested $1,000 into an account that earned a flat 6% annual rate of return. That's a simple way to figure earnings.
The Rule of 72 by Interest Rate
Interest rates can vary, so the Rule of 72 can produce different results based on what you've invested in. Here are some common interest rates, plus the amount of time it would take for you to double your investment with each.
|The Rule of 72 Interest Rate|
|Interest Rate||Time Needed to Double Your Investment|
It’s Just an Estimate
Keep in mind that this is just a quick estimate. The actual amount of time needed to double your money will vary depending on changes in the rate of return over time, what you’re invested in, how you invest it, how interest is applied, and possible tax implications.
The Rule of 72 can also be helpful if you want to quickly compare the rate of growth of two investments. You can see at a glance which one is likely to yield a better rate of return so you can decide how to allocate your money.
The Rule of 72 can also be helpful in gauging the power of inflation. The average long-term inflation rate is between 3% and 4%. You’ll notice that something worth $100 today will cost $200 in about 20 years when you use this rule.
Inflation can have a big impact on your retirement goals. The Rule of 72 is useful in realizing and maintaining a rate of return over time.