Would you like to learn a neat trick that you can show off during cocktail parties and family get togethers? Don’t worry, it doesn’t involve juggling or anything silly like that. It’s just a simple math trick that will make you look like a financial wizard!
This little piece of mathematical mystery is called the Rule of 72. The rule of 72 is a simple way to determine how long it will take to double your money with compound interest at a given rate of return. All you have to do is divide 72 by the annual rate of return and you will get a rough estimate of how many years it will take for the initial investment amount to be doubled.
For example, if you have an investment that pays a 6% annual rate of return, just simply divide 72 by 6 and you instantly know it will take about 12 years to double your money.
The rule works in reverse too. Let’s say you want to find an investment that will allow you to double your money in 10 years. Using the rule of 72 you would simply divide 72 by 10 and the result would tell you that you’d need to earn at least 7.2% compounded annually in order to double your money in 10 years.
As you can see from the table below, the rule of 72 is remarkably accurate but not quite exact. There is a small difference in the actual results and the number you’d get using the rule of 72. But as a rule of thumb, the rule of 72 is still very useful and easily applied in everyday life.