How Long Will It Take To Double Your Money? The Rule of 72

Written by: Mark Cussen

Investing is a very mathematical proposition. Despite the decisions that are made by intuition, the markets that are driven by emotions such as greed and fear and the psychological ploys used by the financial industry, it all just boils down to numbers in the end. These numbers determine how much you will get from an investment, how much tax you will pay on your gains (at least in a taxable account), and ultimately how you will live your life, at least in some respects. One of the most basic mathematical rules that you can learn is the Rule of 72, which determines the rate at which your money will double over time.

How it Works

The Rule of 72 is very simple. The number 72 acts as the divisor and the rate of interest or total return that you earn on an investment is the dividend. The quotient, or answer, represents the number of years that it will take for your money to double at that rate of return. For example, if you are earning 9 percent per year on an investment, then 72 divided by 9 equals 8. Therefore, your money will double every 8 years at this rate of return. Here is the proof:

Year 1: $100       X 9% = $109

Year 2: $109       X 9% = $118.81

Year 3: $118.81  X 9% = $129.50

Year 4: $129.50  X 9% = $141.16

Year 5: $141.16  X 9% = $153.86

Year 6: $153.86  X 9% = $167.71

Year 7: $167.71  X 9% = $182.80

Year 8: $182.80  X 9% = $199.26

Application

Of course, in real life, investments don’t double quite this neatly, especially if they fluctuate in the markets and also because they don’t reinvest their earnings with perfect mathematical efficiency. But this rule can still give you a general idea of how long it will take for a given investment to grow. If you are 25 years old and plan to retire at age 65, then you may want to think twice about locking your money into CDs that are paying 3 percent per year. Using the Rule of 72, it will take about 24 years for that money to double, meaning that it will double less than twice before retirement. On the other hand, the stock market has averaged about 8 to 10 percent growth per year, which means that your money will double about every 7 to 9 years. Therefore your money would double at least 3-4 times over 40 years, assuming that the markets maintain their historical rates of growth. For more information on investment calculations, visit the following links or consult your financial advisor.


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