Doubling Your Money with the Rule of 72
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Ericmcgregor Did you ever wonder how financial professionals can so quickly mentally calculate how much money you’ll have in 30 years based on an investment return? Seems like magic, huh? Well, the magic can be easily attributed to the Rule of 72.
Although the Rule of 72 is a simple concept that many people already know about, it is nevertheless worth reviewing for those who don’t.
In order to utilize the Rule of 72, all you need to know is how to divide various numbers into 72. For example, 9 divides into 72 8 times. 10 divides into 72 7.2 times. Et cetera.
Once you have mastered the basic division tables for 72, you can start to apply this knowledge to calculations like investment returns. Divide the annual rate of return (expressed as a percentage) into 72, and the answer will be the number of years it will take for your money to double.
For example, if you assume your investment is earning 8%/year every year (and 8 divides into 72 9 times), then your money will double every 9 years. If you are earning 4%/year, your money will double every 18 years (72 divided by 4 equals 18). And so on.
This is an easy technique to quickly estimate what your net worth will be down the road given a certain rate of return. It may even help you decide what sort of investments to choose, based on their risk to reward ratios and historical performance rates.
If you have $10,000 invested at 3%/year for example, it will become $20,000 in 24 years (72 divided by 3 equals 24), and $40,000 in 48 years (24 times 2).
If instead you invest the same $10,000 at 6%, it will become $20,000 in 12 years, $40,000 in 24 years, and $80,000 in 48 years. (What a difference a rate of return can make, huh)?
The downfall of this easy calculation method of course, is that rarely do investments make “xâ€%/year, every year. You can achieve an average annual rate of return of “xâ€%, but in the end the total calculations won’t entirely reconcile with your Rule of 72 plan.
So all in all it’s a primitive method of planning your finances, but a useful tip for on-the-fly calculations, and maybe even a party trick or two.
Tagged: Personal Finance, General Tips, math calculations, mathematical calculations, mental math, rule of 72
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I think your calculations for 6% return are off. You claim that 6% will double in 6 years (actually 12 years). You also state, correctly, that 8% will double in 9 years. How does the lower return of 6% double in less time than the 8% investment?
Read it again. It says that 6% will double in 12 years and 8% will double in 9 years. Therefore, the lower rate does not double faster than the higher rate.
Officially, INFLATION is pegged at less than 3%. But it's foolish to believe the government number. Trust your own eyes when you pay for gas, insurance, food, or anything you need to live. Inflation is probably running in the vicinity of 6 to 8%. Just to get ahead, you have to get a return above the inflation rate.
Yes, you can double your money but it won't help if that cold cash will purchase half of the goods & services you used to be able to buy!
The other problem is getting a decent return on your money in the first place. Yes, you can put it into a 'safe' CD or Money market, but there's a problem. Untracked & un-noticed by the great majority of the public, there are real and very serious problems occurring in the banking and investment world. Failures of major banks and investment firms are right around the corner (they're already happening.)
What might be a good strategy? Invest in gold. Learn as much as you can about it. It's a question of not losing what you already have. It's worked very well for me.
Nothing here is investment advice = do your own due diligence and keep yourselves and your families safe.
I think investing in precious metals is a bad idea. If the market totally collapses à la 1929, no one will be looking to trade anything for a gold nugget. Goods (food, etc.)and services will be the ticket if that happens. No one wants gold when their family can't eat. They want a chicken.
Gold is up over 200% in the last 5 years. The mining stocks are double that, yet no one notices. During the Great Depression, price was capped by the gov & Roosevelt confiscated privately held gold. Even going so far as breaking into safe deposit boxes. (What a guy!) What no one seems to know, gold mining stocks did very well in the depression.
Unbeknown to the general public, price of gold is up more than 200% in last five years. Gold Mining stocks have risen more than 2X that. But you won't see it in the financial papers or mags - they want you not to own it. You see, Gold is the perfect barometer of inflation. As the currency is degraded & inflation rears its ugly head, gold price shines.
Eventually, the public will get it when paper assets are worthless. By that time the price of gold will be going parabolic.
I'm not saying it's for the faint of heart or even to make money. The name of the game in the future, the very near future, is to preserve whatever wealth you have.
Has anyone noticed the price of gold these days?
Justine:
You're right, people will want that chicken. But what will they pay for it if the almighty dollar is worthless?
I apologize profusely for the calculation error. It is being fixed. THank you for noticing!