Approaching retirement or wanna double your money- then apply the rule of 72. In finance, the rule of 72, the rule of 70 and the rule of 69.3 are methods for estimating an investment’s doubling time. The rule number that is 72 is divided by the interest percentage per period to obtain the approximate number of periods in years required for doubling.
Although scientific calculators and spreadsheet programs have functions to find the accurate doubling time, the rules are useful for mental calculations and when only a basic calculator is available.
Though this requires some maths calculations to explain things better as these rules apply to exponential growth and are therefore used for compound interest as opposed to simple interest calculations. A formula is used for more than calculating the doubling or tripling time.
So in mathematical equation the Rule of 72 is a simple equation to help you determine how long an investment will take to double given a fixed interest rate.
Here’s how the Rule of 72 works:
At 10%, money doubles every 7.2 years and when you divide 7.2 by 10%, you get 72.
This rule of thumb helps you compute when your money (or any unit of numbers) will double at a given interest (growth) rate. Suppose if you want to know how long it’ll take to double your money at 9% interest, divide 9 into 72 and get 8 years.
You can also do the reverse, and solve for the interest (growth) rate. Remember, the Rule of 72 is an approximation, but it’s a remarkably accurate to use with confidence.
The exact number of years it takes to double once at a 24% growth rate is 3.2 years, which is to say that the Rule of 72 is very accurate around 10% but gets less accurate the farther from 10% you go. At a 24% growth rate you can expect your money to double 3 times in about 10 years.
Suppose $1 doubles to $2 in the first three years; $2 doubles to $4 in the second set of three years; and $4 doubles to $8 in the third set of three years. Thus, you would expect the future EPS in ten years to be something like $8 per share.
Using the Rule of 72 is therefore a great way to help understand how much compound interest can help you accelerate your savings. It also helps to show the value of starting to save for retirement earlier. If your money could double every 10 years, you’ll have much more time to grow it if you start investing sooner rather than later.
When you are using the rule to figure out a growth rate for something like earnings over specific years say like for ten years, you need to know on average, how many years it took to double once. Suppose earnings went from $1 to $6 over a ten year period. $1 went to $2 for one double. $2 went to $4 for a second double. $4 went to $6 in half a double (half of $4 is $2 which when added to the $4 makes $6). Two and a half doubles in ten years. 10 / 2.5 = 4. Four years to double once on average. Then just divide 72 by 4 and you get 18. The answer is that earnings grew by a compounded average growth rate of 18% year over the ten year period.
By understanding the Rule of 72 you can quickly determine:
- The rate of return required for an investment to double in value over a pre-defined number of years
- If you know the given rate of return on your investment, you can quickly determine how long it will take for your investment to double in value.
As you can see, the math is quite simple to understand after a bit of practice. However, there are two important factors to note:
The rate of return using the rule of 72 is the net return. (After taxes and fees).The results are based on yearly compounding returns. This means the investment return is added to the initial investment each year. As you practice, you will be able to do most calculations mentally and if that’s a bit complicated then you can use the calculator.
This rule helps you to understand the value of savings and how much your savings can accelerate through compounding. You’re not just potentially getting a return on your original contributions, but also a return on what your money is earning every year.
The Rule of 72 also helps drive home how much more you could save by starting to save earlier if your money could possibly double every 10 years, you’ll have much more time to grow the money if you have, say, three decades left until retirement, as opposed to two or one.
Even if you have crossed the age of 35 and you are in 40s or 50s do not lose hope. Only thing is that your growth will suck more money to be saved for your future may be four times than annual savings amount of a 25 year old. Things apart about the facts but what I believe is that there is always a silver line for savings only need is your determination to save right now.