Investing can be very complex! There’s a reason it’s a whole industry in itself. But that doesn’t mean us normal folks can’t use some simple tools to have at least some idea of what’s going on. And let’s be honest, most of the time we don’t need (or want) the kind of precision that real investors typically have when predicting how our investments are going to do. And that’s okay!
Here are Five Fast Facts on Rule of 72:
- 🏴☠️ What Is It? - Much like the pirate code, this “rule” is actually more of a guideline. It’s an estimate of how long it takes for an investment to double if you get the same rate of return every year. For example, if you invest $1000 at a 10% return per year, how long will it take for that to become $2000?
- ➗ The Math - It’s a pretty simple calculation, really. You just divide 72 by the annual rate of return to get the number of years (roughly) it’ll take to double. In the above example, you divide 72 by 10 to get 7.2. So, it’ll take (roughly) seven years for your investment to double.
- 👍 The Logic - It’s not meant to be precise, it’s meant to give you a quick estimate that is reasonably accurate. Plus, most of the time investments don’t have a locked-in rate of return, anyway. Think back-of-napkin rather than calculator.
- 👍👍 Make It Even Simpler - If you want an even simpler version, you can think about it in terms of 10s and 7s: at 10% return, it’ll take 7 years to double your investment; at 7% return, it’ll take 10 years to double your investment. Piece of cake!
- ⏲️ Let History Guide You - Part of the reason this works so well is that history seems to love it. If you look at the stock market over the last half century, guess what rate of return it’s averaged? Yep, 10%. It’s like it was destiny…
🔥Bottom line: This little mental trick can be handy when it comes to planning for the future, whether you’re talking about retirement, college savings, that new car fund, or anything else. It’s perfect for when you don’t need precision, but just want a general idea how long it’ll take for your money to grow to where you want it.
What other investment “rules” do you know?
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