The Rule of 72: Interest Rate

Topics: Investment, Saving, Finance Pages: 2 (484 words) Published: October 27, 2011
What is the rule of 72?  Well… here’s the equation:
Years to double = 72 / Interest rate
DO NOT reread this equation. The rule of 72 is a hard rule to explain. I will do my best to try to explain it. The answer to ‘rule of 72’ gives us a number of years. This number of years tells us how long it takes to double our money. Let’s say you have 100 dollar. The ‘rule of 72’ helps us figure out how long it will take to have 200 dollars. Scenario 1: You have invested your 100 dollars in a 3% certificate of deposits. 72 divided by 3 is 24. In 24 years, your 100 dollars had now turned into 200 dollars. Scenario 2: You have invested your 100 dollars in a bond fund and you gain 5% consistent returns. 72 divided by 5 is 14.4. In 14.4 years, your 100 dollars has now turned into 200 dollars. (**writer’s note: the larger the interest earned, the lower the amount of years required for your money to double) This 'rule' is very helpful to get another perspective on your investments.  Let’s look at how this rule applies to the real world. As I write this article, I am talking to a customer service agent for my personal savings account.  Sadly, the current interest rate is .05%.  Using this formula, we can see how long it will take to for me to double my money within my savings account: Years to double = 72 / .05%

Years to double = 1440
Within my savings account, it will take 1440 years for my money to double.  In the real world, this is a horrible long term investment strategy; inflation and taxes will destroy the value of my money. However, let’s pretend that an investment is returning 5%.  Using the 'rule of 72', a 5% investment will double in 14.4 years.  If my friend James had $10,000 to invest, in 14.4 years he will have $20,000.  That’s starting to look better.  Remember, James is making $10,000 and not working a single day of those 14.4 years. Now, let’s go even bigger.

Imagine... you have a 10% return on your investment.  It will take 7.2 years to double...
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