How to Understand and Apply the Rule of 72
Posted October 1, 2022
Let’s go back to math class. In elementary school, we learned the basics of addition and subtraction before moving up to the complex world of multiplication and division. Perhaps at the time, you didn’t see the point. You may even recall asking your teacher, “when will I use this in my real life”?
Well, the day has come. The Rule of 72 uses a simple equation to help you approximate the number of years it will take for you to double your investments at a given rate of return.
The Equations
Get your pencils ready and write this down— it will be on the test (kidding, kidding). All jokes aside, if you are looking to either a) find out how many years it will take to double your investments or b) find the expected rate of return, the Rule of 72 is a quick and easy way to find the answer.
To find how many years it will take to double your investment, divide 72 by the expected rate of return. For instance, if your expected rate of return is 8%, it will take nine years for the investment to double. It is important to note that the Rule of 72 relies on a single average rate over the lifetime of the investment.
Now, if you’d rather find out the expected rate of return needed to double your investment, you divide 72 by the years you need the investment to double. For example, if you expect it to take six years for the investment to double, you can conclude that the rate of return is 12%.
The Rules to Follow
Remember when your teacher would present a relatively simple concept, like the Rule of 72, and then follow it up with rules, exceptions, if then, and different scenarios when the idea would not apply? Well, buckle up and put on your thinking caps because there are a few things you’ll need to know about the Rule of 72 to use it correctly.
First and foremost, the Rule of 72 applies to compound interest and growth, not simple interest. This means that “the Rule of 72 can apply to anything that grows at a compounded rate such as population, macroeconomic numbers, charges or loans” (Source: Investopedia).
Next, you’ll need to remember that the Rule of 72 is not super accurate for interest rates below 6% or above 10%, but it still works from a general assessment. To ensure you get the most accurate result, use the Rule of 72 when interest rates fall within the range of 6-10%.
Finally, you’ll need to know when to use the Rule of 72 or when it’s more appropriate to use the Rule of 69, Rule of 70, or the Rule of 73.
Not sure which to use or even what these other Rules are? Unlike in the classroom, it’s not considered cheating when you reach out and ask your neighbor at Thayer Financial to help you find the correct answer.
The Answer to Your Questions
The Rule of 72 is not an exact science but is instead a quick and easy way to approximate how long it will take for your investments to double. Of course, you can find the exact answer using a more complex equation or plugging the data into an Excel sheet.
However, if you’re looking to learn more about the Rule of 72, or any of the other rules mentioned above, the team at Thayer Financial is ready to help. We are here to help you create an investment strategy that will pay off exponentially and understand every facet of it.
We believe in always doing what is right for the client ; one way we do that is through clear and transparent conversation from the beginning.
Ready to get started? Reach out to our team today by scheduling an initial phone consultation at https://www.thayerfinancial.com/contact/.
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