#31 - Rule of 72
I love math. Today, I am going to share with you one of my favorite math tricks - the Rule of 72. The Rule of 72 is a way to quickly approximate how long it will take for something to double. Here is the equation: 72 / rate of return = number of years For example, if you assume an 8% rate of return, it will take about 9 years for your investment to double. This rule allows a simple way to look into the future (based on your return assumption). For example, someone who is 30 is roughly four doubles away from the traditional retirement age of 65 if they assume an 8% return. Therefore, $100 invested should be worth about $1,600 when they retire. If you assume a 6% return, they should have about three doubles and about $800 when they retire. The Rule of 72 is just a rough approximate. At a 2% return, the Rule of 72 is closer to the “Rule of 70,” and at a 14% return, the Rule of 72 is closer to the “Rule of 74.” In other words, this rule should just be used when an estimate will suffice. Since hearing about this rule, I have used it frequently when I wanted to do some quick compounding calculations in my head. For many, I realize the need and definitely the desire to use the Rule of 72 won’t come up. On the other hand, if you happen to be a reader who enjoys thinking through personal finance, the Rule of 72 is a useful trick to have.
Interesting Article(s) or Video(s)
SmartAsset - Rule of 72 Defined
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Thank you for reading! Have you ever used the Rule of 72 before?