The Rule of 72
How to double your money in 10 years.
Elizabeth Carlassare
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The Rule of 72
Today’s topic is the rule of 72.
I want to tell you about a cool little trick you can use to quickly estimate the interest rate you would need to earn to double your money in a specific number of years. Here’s how it works: Simply divide 72 by the number of years to get the interest rate you’d need to earn for your money to double during that time.
How to Double Your Money
How to Double Your MoneyLet’s say you want your money to double in 10 years. What interest rate would you need to earn? All you need to do is divide 72 by 10. You’d need to earn a 7.2% interest rate for your money to double in 10 years. And what if you wanted your money to double in 5 years? 72 divided by 5 is 14.4. You’d need to earn 14.4% per year if you wanted your money to double in 5 years.
You can also use the rule of 72 backwards: To estimate how long it will take for your money to double, simply divide 72 by the interest rate. For example, let’s say you’re having a super successful investing run and earning 20% annually. How long would your run need to last for your money to double? Just divide 72 by 20. Your money would double in only 3.6 years.
Pretty nifty!
OK, to recap, you can divide 72 by the number of years to get the interest rate. Or you can divide 72 by the interest rate to get the number of years it will take for your money to double. The rule of 72 gives a close approximation for annual compounding.
Guard Against Inflation
And now for a bonus variation of the rule of 72. You can also use the rule of 72 to easily estimate how long it will take for your money’s buying power to be cut in half due to inflation. Simply divide 72 by the inflation rate. So, at an inflation rate of 3%, it would take 24 years (that is, 72 divided by 3) to reduce the value of money stored under your mattress by half. At an inflation rate of 6%, it would take only 12 years to reduce the value of money by half.
In the first four months of 2007, U.S. inflation, as measured by the consumer price index, went up at a 4.8% annual rate. At this rate, it would take 15 years for your money’s buying power to be reduced by half.
The moral of the story is: Don’t store money under your mattress or bury it in the backyard! You want to keep your money invested in vehicles that are very likely to outpace inflation. Inflation is public enemy #1 when it comes to wealth creation. It can silently erode the value of your money. In fact, in episode 31 I’ll spend the entire episode on what inflation is and how to stop it from eroding your savings.
So, here’s wishing you many happy returns that outstrip inflation by a wide margin!
Administrative
Today, I’m giving away two copies of The Truth About Money by Ric Edelman. This book covers a wide variety of personal finance topics and includes a fun explanation of the rule of 72. It’s also one of the books on the summer reading list posted on the Money Girl website at QuickandDirtyTips.com. This week’s winners are Sue in Menlo Park and Casey in Ann Arbor. Congratulations, Sue and Casey! Be sure to check your email for instructions and enjoy the book.
Cha-ching! That’s all for now, courtesy of Money Girl, your guide to a richer life.
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